Jim:
We have a paradoxical situation in the gold market. Analysts, central bankers, and every other pundit go to great length to explain that gold is nothing more than a commodity having lost its value as a monetary asset. However, gold is not trading as a commodity. Commodities price themselves in a supply and demand market with moves fostered by speculators attempting to create/profit from momentum. If gold were trading as a commodity, its would be trading in a 25-50 dollar range. Those claiming that gold is a commodity are treating it very much like a monetary assest, buying and selling openly to hold a price level relative to other monetary assests. While they have plenty of ammunition at the moment to preserve this paradox, gold will in time trade for what it truly is a monetary assest. This does not mean paper currencies have to be gold backed rather, golds value maintains and will continue to maintain a position on the balance sheet of the cb's of the world. Trading gold for interest bearing paper may seem prudent today, but there will be situations when some of those paper assests including US treasuries may be a liability. This myopic position will not endure. I would think that rather than one calamitous situation enhancing golds stature, there will be a slowly unfolding scenario such as: The recovery of the Asian markets. At first this will cause a rise in commodity prices, followed by an increasing amount of foreign reserves for those resurrected tigers. Here the chickens come home to roost. There is a lot of latent animosity on how the IMF/US treated them when the devaluations occurred. It would appear that rather than investing their increasing foreign reserves in US debt, they may seek alternative investments. The Chinese have already made reference to broadening out their reserve holdings. A bit of inflation, a retreat of the US dollar, and rising bond yields will at some point begin to play havoc with the gold carry trade involving a guaranteed cantango in their investments of proceeds in US treasuries. When their is active considerion of repaying the gold loans rather than rolling them forward, the action in gold will begin and broaden out. To predict when this will happen and it will, is very difficult. It would appear there is a minimum of one to two years left within the current cycle, although depending on the rate of recovery in Asia this is debateable. Asia will recover, and they have memories greater than the biggest elephants. These are cultures that put a premium on saving face. How and when they lean on the west should be interesting.
Ken |
