|
|
Why Gold is Going Higher
What drove a large portion of the economic growth and increase in financial wealth in the U.S. over the last thirty years was a surge in credit growth in which consumers, businesses, states, and the government accumulated huge sums of debt to fuel consumption. Debt levels reached unsustainable levels but consumers at least have seen the light and are now actually paying down debt and shunning large credit card balances. This is a good thing for individuals, but collectively this drags down economic growth and government revenue, as was the case in Japan over the past two decades. And just like Japan, the U.S. government is refusing to allow past excesses to be worked off by swapping private debt for public debt. This will not work as you cannot escape the reality of accumulated imbalances; the question now is how does one want the pain? Do we take the pain in a few years in a quick sharp growth decline (Great Depression) or do we want to draw it out in a long and drawn out affair (Japan's lost decade)? We are certainly following Japan's route which will lead to below economic growth levels for years. The government needs to learn from history and would do well to read the wisdom of Kenneth Rogoff, Professor of Economics and Public Policy at Harvard University, and former chief economist at the IMF, in his recent article, "Why America Isn't Working." Why America Isn't Working CAMBRIDGE - As the US economy limps toward the second anniversary of the Lehman Brothers bankruptcy, anemic growth has left unemployment mired near 10%, with little prospect of significant improvement anytime soon. Little wonder that, with mid-term congressional elections coming in November, Americans are angrily asking why the government's hyper-aggressive stimulus policies have not turned things around. What more, if anything, can be done? The honest answer - but one that few voters want to hear - is that there is no magic bullet. It took more than a decade to dig today's hole, and climbing out of it will take a while, too. As Carmen Reinhart and I warned in our 2009 book on the 800-year history of financial crises (with the ironic title "This Time is Different"), slow, protracted recovery with sustained high unemployment is the norm in the aftermath of a deep financial crisis. Why is it so tough to boost employment rapidly after a financial crisis? One reason, of course, is that the financial system takes time to heal - and thus for credit to begin flowing properly again. Pumping vast taxpayer funds into financial behemoths does not solve the deeper problem of deflating an overleveraged society. Americans borrowed and shopped until they were blue in the face, thinking that an ever-rising housing price market would wash away all financial sins. The rest of the world poured money into the US, making it seem as if life was one big free lunch. Despite the growth of more than a trillion dollars in the Fed's balance sheet and Federal government debt, we still have an economy that appears stuck in the mud as the following articles point out.
If at first you don't succeed, try, try and try again. This is what I believe will be the mentality of our government and monetary authorities in terms of throwing money at the economy to get it working again. This will ultimately lead to higher gold prices in which the supply of US Dollars increase relative to the supply of gold.
Source: Bloomberg While there are still strong deflationary forces (reduced credit card debt, defaulting loans, falling wages), I believe that inflation will ultimately rear its ugly head in the years to come. I am not alone in this view as the world's biggest bond fund, The Pacific Investment Management Company (PIMCO), is making an $8.1 billion bet against deflation. Pimco Makes $8.1 Billion Bet Against `Lost Decade' of Deflation Bill Gross's Pacific Investment Management Co. made an $8.1 billion wager that the U.S. won't suffer a decade of deflation like the one that crippled Japan starting in the 1990s... "We think the possibility that the U.S. goes 10 years with stagnant or falling prices is remote," Mihir Worah, the head of Pimco's real return portfolio management team, said in an e- mailed response to questions. As inflation increases from governments debasing their currencies I believe more and more investors will turn to gold to maintain their purchasing power. This was the same conclusion former Fed chairman Alan Greenspan came to and commented upon at the Council of Foreign Relations recently. Alan Greenspan called gold the "canary in the coal mine" and that "fiat money has no place to go but gold." Greenspan's Warning on Gold Alan Greenspan spoke at the Council on Foreign Relations earlier today, and what was his advice? That central bankers should be doing what these columns, among others, have been rattling on about, namely that they should be paying attention to gold. "Fiat money has no place to go but gold," the former Fed chairman said at the Council, according to economist David Malpass, who quotes Mr. Greenspan in one of Mr. Malpass' emails on the political economy. Mr. Malpass writes that the former chairman of the Federal Reserve's board of governors was responding to a question in respect of why gold was hitting new highs. Mr. Greenspan replied that he'd thought a lot about gold prices over the years and decided the supply and demand explanations treating gold like other commodities "simply don't pan out," as Mr. Malpass characterized Mr. Greenspan. "He'd concluded that gold is simply different," Mr. Malpass wrote. At one point Mr. Greenspan spoke of how, during World War II, the Allies going into North Africa found gold was insisted on in the payment of bribes.* Said the former Fed chairman: "If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it." In short, the fundamental issues that plagued our economy in the 2008 economic and stock market collapse are still with us today and central bankers and governments across the globe will likely resort to more money printing and increasing public debt levels to move things along. This is what I believe will drive gold even higher in the years to come. Gold is currently overbought and due for a pullback, but I believe the pullback will be short-lived as the fundamental reason for gold remains; it's a bet against irresponsible governments and protection against currency debasement.
|
 |
 |
Gold hit an all-time high today, rallying up to $1283.80 an ounce at one point. Gold is certainly overextended and ripe for a short-term correction, though I am still bullish on the shiny metal in terms of my longer term view. My bullish view on gold stems from the fact that the U.S. government is trying to kick the can down the road in terms of the misallocation of resources and cumulated debt.
Chris graduated magna cum laude with a B.S. in Biochemistry from California Polytechnic State University, San Luis Obispo. He joined PFS Group in 2005 and is currently pursuing the designation of Chartered Financial Analyst. His professional designations include FINRA Series 7 and Series 66 Uniform Combined State Law Exam. He co-manages PFS Group's Precious Metals Managed Account, Energy Managed Account, and Aggressive Growth Managed Account with Jim Puplava. Chris also contributes articles and Market Observations to Financial Sense and co-authors In the Know—a weekly communication for Jim Puplava's clients only—with other members of the trading staff. Chris enjoys the outdoors.