Thanks.
You are one of 9 people who I have bookmarked. These are posters who I don't always agree with, but who I have found consistently can back up their assertions with facts and logic.
re: gold's purchasing power tends to increase during deflationary times
I'm assuming you mean, it doesn't just increase in absolute terms, but it increases it's purchasing power more than cash does. In order for this to happen, gold has to be treated, not as a commodity or industrial raw material, but mostly as a "safe haven" when people's trust in everything is being shaken. And the supply/demand is not elastic, as producers can't increase production much, when demand goes up, and there is a lag time before new mines can be brought into production (3 years? more?)
re: their (gold miners) profit margins will (increase), due to falling input costs
Is this effect any stronger for gold miners, than it is for any other metal miner, or for that matter, any manufacturer? As I understand it, in a general deflation, businesses cannot decrease their costs (wages and debt servicing) as fast as their revenues are falling. That's why profits collapse.
re: since central banks can be expected.....to attempt to counteract the deflation by printing a lot of fiat money, and governments can be expected (see Japan) to engage in fiscal profligacy, gold will attract some funds
Either I'm not understanding your reasoning, or you are giving mutually exclusive arguments in favor of gold. "Printing a lot of money" would increase the $/gold ratio, because it is inflationary, not deflationary. Which route will lead to the GoldenFuture (can't have both)?. Your argument in favor of non-US gold companies suffers from this same internal contradiction: a strong and trusted dollar (trusted, at least in relation to the currencies of "emerging" countries like SA) may decrease costs for South African mines, but it also means gold isn't needed as a SafeHaven.
re: it is an independent monetary asset, i.e. it doesn't represent anyone's "promise to pay"
IMO, this is the core of the matter. Maintaining the value of a currency (not backed by gold) is dependant on a collective decision to trust the government (who prints and manages the currency). The dollar has value as long as everyone agrees it does, and for no other reason. If that trust dissolves, for any reason, then people search for Safety, something that has value no matter how chaotic, violent, or irrational the world around them becomes. Several types of assets meet this criteria:
1. real estate. I don't like this because: currently prices are high, it's not a liquid asset, transaction costs are high
2. gold
3. other precious metals (silver, platinum)
4. lumber, especially high quality rare or old-growth lumber. For instance, to make violins, you need wood with very specific qualities, that aren't met with any second-growth or rapidly-growing trees. So, in essence, "they aren't making any more of it". Unfortunately, although supply won't increase, demand is likely to collapse in a deflationary environment. And not come back up until overall demand in the economy comes back.
Today, there is still a huge amount of trust in the dollar. It wasn't weakened by the events of 10/98 or 9/01. In fact, the dollar has been strengthened, so far, by "exogenous shocks", as investors exit all other currencies, (and assets denominated in all other currencies), and go to the Safety of the Dollar (and not to gold, not yet). In essence, the trend is toward the dollarization of the entire planet.
I'm wondering (not at all sure, just thinking out loud) whether the move out of dollars and into gold, isn't going to happen until Moody is downgrading the debt of the U.S. government, as they are doing to Japanese debt. In Japan, first they brought interest rates to zero, and that didn't work. Then they tried massive fiscal stimulus, and that didn't work, either. Their economy is so big, and started with so many strenghs, that they have been able to put off the day of reconning, for 11 years and counting so far. In the U.S., we still have 1.75% of rate lowering to do, and the government debt (as a % of GDP) is still far lower than Japan's. The BorrowAndSpendRepublicans can probably borrow several trillions more, before we "hit the wall". So maybe this process will play out, but is still years in the future. And in the meantime, the dollar gets propped up by the flow of scared money out of the currencies (and assets) of Japan, Argentina, Russia, South Africa, etc., etc.
I've heard several very smart people say that the Euro is going to (at least partially) supplant the dollar as the global reserve currency, and it would be worthwhile to hedge dollars and dollar-denominated assets with Euros. I'm sceptical of this, because:
1. the Euro is new, and it takes a long time for Trust to develop
2. Europe has structural rigidities not present in the U.S., which means their economic growth is going to be permanently lower than the U.S (a continuation of a 200-year-long pattern).
3. In the looming WarOfCivilizations that Bin Laden has announced (Christian/Jewish/Hindu/secular/individualistic/rich vs. Muslim/Chinese/authoritarian/poor is how the battle lines look to be drawn), Europe is nearer the front lines than N. America is. Yes, I know, it's just as easy to ship a container with a "dirty bomb" to LA, as to Hamburg. But the Europeans also have a much larger population of un-assimilated immigrants from Moslem countries. |
