No, Dylan Grice Did Not Say Germany’s Unwillingness To Print May Give Rise To Another Hitler

Monday, December 5th, 2011

A few weeks ago, SocGen’s Dylan Grice released a piece which quickly became a scathing focal point in the inflation-deflation debate, in that he speculated that it was not the Weimar-unleashed hyperinflation (which incidentally is the primary reason why most of Germany now dreads what the outcome of a profligate ECB would look like) that led to the surge of the Nazi party, but in fact the opposite: it was the stinginess of German monetary authorities in the 1930s that further exacerbated the situation and helped unleash the Hitler juggernaut.

Many promptly took sides in the argument, the bulk of which were shocked that Grice – traditionally a defender of prudent monetary and fiscal policy, would go so far as suggest that it is the ECB’s duty to print or else it may justify another “Hitler”-type advent. Well it seems there was more than meets the eye, and in a follow up piece the strategist says: “The purpose of the historical analysis, therefore, was not to reach conclusions about how adherence to hard money principles will linearly lead to resurgent fascism, or war on a par with that seen in the 1930s. Neither was it in any way a defence of Keynesian fiscal activism.

It was to illustrate that adherence to even the best principles must come at a price, making a judgment on whether or not that price is prohibitive or not is unavoidable, and today Germany and the ECB have to make that judgment.” And his conclusion: “From the beginning of this crisis I’ve believed the only way politicians will get ahead of it is to bring in the ECB. Since I believe politicians do want to get ahead of it, I expect the ECB to print, and print copiously. I’ve repeatedly emphasized that printing will solve nothing, beyond buying market confidence for a while… All ECB printing will do is buy the politicians time and space to reset government and private sector balance sheets, to reform how their economies function and be honest with their own citizens.

Whether they use that time or not is a separate question (frankly, I’m not hopeful).” But instead of us putting words in Grice’s mouth, here is the explanation straight from the horse’s mouth. Incidentally we agree 100% with Grice on the issue that eventual printing is inevitable. Which for the TLDR crowd means the entire Grice missive can be summarized as follows: ‘buy gold.’

From Dylan Grice:

My point was that there is always a price. Today, the price of Germany and the ECB holding on to their hard money principles is a possible break-up of the single currency. But both have signalled that they won’t pay that price (“if the euro fails, Europe fails”). So my conclusion was that since Germany’s stance is logically inconsistent (it wants to hold onto its principles but it doesn’t want to pay the price), it will ultimately be forced to choose. My prediction was that it   will sacrifice its principles. The three broad criticisms I got from readers were:

• My history was factually wrong
• My analysis was simplistic
• In suddenly urging the ECB to print, I was a hypocrite

Let’s go through each one in turn.

Complaint #1: Grice’s history is disgraceful and wrong

One common response to my thesis was that “fear of inflation” had nothing to do with Germany’s decision not to devalue. In fact, the key factor was the  foreign debt Germany owed to the Allies. A number of you replied with this criticism, but the following was my favourite.

“Just read Dylan Grice’s case that Reichsbank’s hard currency policy helped the Nazis to power in 1933. I am amazed that SG would allow such Germanophobic historical crap to be published under its name. Unbeknownst to your strategist, the Allies set Germany’s monetary policy back then. His paper is a disgrace.”

 

Irate Reader 1

Fanmail, eh?! To be fair to Irate Reader 1, foreign debt was an issue. According to Adam Tooze [See "Wages of Destruction: the Making and Breaking of the Nazi Economy" by Adam Tooze], then American President Herbert Hoover was leaning very heavily on Germany not to devalue because he was concerned about the value of American loans to Germany. But to say the Allies were setting German policy is quite an exaggeration. According to Tooze, the UK was very keen on Germany following its policy of devalution, while the French were offering them cheap refinancing credit. Keeping America onside was deemed by Germany – rightly or wrongly – to be in Germany’s best interests.

Of course, the logic that said Germany couldn’t devalue because devaluation would merely lead to an increase in the real debt burden is flawed, because the alternative policy of deflation also leads to an increase in the real debt burden (because the debt was denominated in gold). What Germany needed then, as various countries in the eurozone need today, was to default, plain and simple. So if Irate Reader 1 and those who made the same point are correct, the parallel with today is ironically even more acute. Then it was the US forcing an overindebted country into depression rather than allowing it to default; today

Germany is doing the same thing.

But as it happens, it’s just not correct to claim that fear of inflation had nothing to do with Germany’s decision to deflate rather than devalue. According to a speech given by then Reichbank president Hans Luther in September 1931:

“People point to the fact that inflationist countries receive a premium on exports as their costs have not adapted themselves to the depreciation of their currency. All that is true in itself: we have, indeed, experienced it ourselves. But have we not also experienced what follows? Have we quite forgotten that this advantage is only present in the first stage of inflation, and that as soon as costs and prices catch up the premium on exports vanishes … Then there would certainly be a demand to create a new “first stage” and so on. For this reason there is no question for us of a carefully controlled dose of inflation.”

At the same event, then-Chancellor Bruning said:

“Conditions in Germany, however, are very different from those in Britain. No people that has had to endure, as Germany has, the ghastly experience of such inflation, can tolerate a fresh blow, in times of the greatest uncertainty and fear, to confidence in the future of their savings.” [The Economist, Oct 3rd 1931, page 613 for both speeches]

If that’s not fear of inflation driving a deflationary policy, I’m not sure what is. As for the charge that my observations were Germanophobic ? I think that implies that I’m blaming Germany for their depression, or even for what followed. But I wasn’t (and I don’t as it happens). I’m not interested in blaming anyone for what happened. Sometimes things just happen. I am just trying to understand why and how.

Complaint #2: Grice’s history is simplistic

Another common complaint was that I wasn’t doing justice to an historical event with complex causes. One client wrote:

“Although a nice story it is more a fairy tale. Society/human nature/markets/economies are too complex to go back and say what would have happened. It’s futile anyway; you can’t do anything about the past but learn from it. And Dylan doesn’t.”

 

Dismissive reader

But I thought it was best summarized by a reader’s comment on the write-up of my original piece on the FT’s excellent Alphaville site:

“This is hideous historicism and statistical manipulation leading to grand and sweeping conclusions. This is the worst sort of shamanism!”

Shamanism?! I actually looked up shamanism in the dictionary and found it had something to do with the American-Indian religion. I think he meant charlatanism. Anyway, these readers were frustrated that my treatment did not do justice to a highly complex phenomenon. Why was I so sure unemployment was the decisive factor behind the Nazi rise, as suggested in the chart below?

If professional historians who have devoted their entire careers to the study of Hitler’s rise to power cannot agree, how can a four-page investment strategy report? And anyway I wasn’t attempting to provide the definitive answer. The fact is we don’t know and we probably won’t ever know, because we can’t ever know what the single major cause was, or even if there was a single major cause. That’s why I wrote.

“… how different might history have been if the Germans had inflated their economy when the crisis broke? It’s impossible to say.”

But what seems obvious to me is that the misery caused by yet another German economic crisis combined with uniquely German circumstances (e.g. the humiliation at Versailles, a 15 year decline in living standards, a calling into question of the liberal economic doctrine of boundless growth) drove demand for  a new belief system capable of explaining the world around them.

So I find it highly implausible to say that the depression – which I proxied with the unemployment rate – had nothing to do with that demand, and that it was merely coincidental to political radicalism. If we accept that the depression was one factor, it follows that anything weakening the intensity of that depression would have lowered the probability of the Nazis gaining power. And if we accept that an inflationary policy would have mitigated the intensity of the depression, the thought experiment and any logical conclusions derived from it seem perfectly valid to me.

Complaint #3: Grice is a hypocrite calling on the ECB to print

This was actually a slightly puzzling one for me, as I thought I’d made my position clear. But I couldn’t have been because quite a few of you raised the same objection. As (another) irate client wrote:

“Your hypocrisy is astounding. After preaching about the evils of money printing, you now join in with the chorus, squealing for the ECB to ride to your rescue by bailing out your bankrupt employer!”

 

Irate Reader 2

Or another good one from the Alphaville readers’ comments

“I find it quite entertaining how so many people who have been blustering and soap-boxing about the importance of hard money and criticizing money printing, quickly ‘go soft’ when their policies are actually in danger of being enacted. Grice being a case in point.”

This is not what I said. I argued only that Germany’s principled stance exacerbated its depression and served the Hitlerite cause. If we all agree that serving the Hitlerite cause was a bad thing, then we presumably also agree that a willingness to compromise its principles would have been a better thing.

I found this not only interesting, but challenging too, because the corollary is that there is no such thing as an unbendable principle. This might be an uncomfortable observation, but that doesn’t make it false. If a principle is unbendable it ceases to be a principle. It instead becomes a rule. And I agree with Doug Bader, the British WW2 fighter pilot, who said “rules are for the obedience of fools and the guidance of wise men.”

The purpose of the historical analysis, therefore, was not to reach conclusions about how adherence to hard money principles will linearly lead to resurgent fascism, or war on a par with that seen in the 1930s. Neither was it in any way a defence of Keynesian fiscal activism. It was to illustrate that adherence to even the best principles must come at a price, making a judgment on whether or not that price is prohibitive or not is unavoidable, and today Germany and the ECB have to make that judgment.

I categorically did not recommend that the ECB or Germany go down the printing path. What I actually wrote on page 4 was this.

“ … whether or not Germany wants to do that is its decision. To be clear, I’m not recommending any particular course of action and offer no comment on what I think they should do. I’m only trying to understand what I think will happen … it is entirely rational for them not to sanction an ECB funding of a bail-out … if they’re so fearful of the dangers of playing fast and loose with the credit system. I don’t blame them for that at all. Central banks’ over-willingness to play such games in recent decades has been instrumental in creating the overleveraged world we live in today.”

As a general principle, I don’t make policy prescriptions. I don’t believe my view on what should be done is particularly relevant to investors. The world is full of opinions about how the world should work, and how it should be run. Does it really need another one? I don’t think it does, but to bend a principle (!) for the sake of clarity, here’s what I think should happen. I think the ECB shouldn’t get involved. I think it shouldn’t sanction any ECB funding of the ESFS either. I think it should tell governments who made this mess that they can fix it. It should say, “If you want a central bank that prints money when things get tough go and launch your own currency using your own central bank and print until your hearts are content.”

But then, I’m not emotionally attached to the euro, or Germany’s popularity in Europe. And I think the ECB and Germany’s politicians are. Nor is this a new idea on these pages. It is a position we’ve taken since the crisis broke. On 27 May 2010, after the very attempt to ring-fence the peripheral eurozone economies, I wrote a piece called “Print baby print” in which I said the following:

“Today, the ECB is buying insolvent eurozone government debt which it is promising to sterilise. Yet they face the same stark calculus faced by their Anglo-Saxon cousins in 2008. You can only worry about the economy’s ‘price stability’ if the economy hasn’t already melted down! So here’s my prediction: they won’t sterilize, and the [QE] program will expand.” [See "Print baby print -? emerging value and the quest to buy inflation" Popular Delusions, 27/05/2010]

From the beginning of this crisis I’ve believed the only way politicians will get ahead of it is to bring in the ECB. Since I believe politicians do want to get ahead of it, I expect the ECB to print, and print copiously.

I’ve repeatedly emphasized that printing will solve nothing, beyond buying market confidence for a while. Ultimately, I believe the eurozone’s structural problem is its government-heavy, over-regulated, anti-entrepreneurial welfare model which I believe is broken. In client discussions I’ve drawn the parallel between today’s uncompetitive eurozone, with the unrealistic social promises it has made to future generations, and Detroit. All ECB printing will do is buy the politicians time and space to reset government and private sector balance sheets, to reform how their economies function and be honest with their own citizens. Whether they use that time or not is a separate question (frankly, I’m not hopeful).

Tags: 1930s, Adherence, Balance Sheets, ECB, Fascism, Focal Point, Grice, Hard Money, Hitler, Hyperinflation, Inflation Deflation, Juggernaut, Market Confidence, Monetary And Fiscal Policy, Monetary Authorities, Nazi Party, Stinginess, Strategist, Time And Space, Weimar
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Gold Market Cheat Sheet (August 8, 2011)

Sunday, August 7th, 2011

Gold Market Cheat Sheet (August 8, 2011)

According to Erste Research, “QB Asset Management calculates the so-called “Shadow Gold Price” (“SGP”). It divides the US Monetary Base by U.S. official gold holdings, the same formula actually used during the Bretton Woods regime to fix the exchange value of the dollar at USD 35.00/ounce. It would be the theoretical price of gold today, were the Fed to depreciate the USD to a level that would cover systemic bank liabilities. The current Shadow Gold Price would be just under USD 10,000.”

For the week, spot gold closed at $1663.80, up $35.92 per ounce, or 2.2 percent for the week. Gold equities, as measured by the Philadelphia Gold & Silver Index, fell 4.74 percent. The U.S. Trade-Weighted Dollar Index rose 0.78 percent for the week.

Strengths

• In tumultuous week of price action, as evidenced by the S&P 500 Index falling 7.19 percent, gold faired pretty well with a 2.1 percent gain, but silver fell 4.3 percent.
• Both Royal Gold and Yamana Gold posted positive gains for the week. Royal Gold benefits from its first in line royalty structure of income generation; the company essentially gets paid via the revenue stream from gold sales on mines that other companies operate, while Yamana Gold has begun to regain market confidence in its ability to deliver consistently on company guidance.
• Year-to-date, emerging market central banks have bought nearly 180 tons of gold, more than double the roughly 73 tons purchased by central banks globally in the whole of 2010. This hits the central issue of the public’s recognition that government policy makers in Europe and the U.S. do not have the will to address spending cuts. The budget deal over the prior weekend only allowed for a $10 billion reduction in planned spending increases over the next two years while a couple of trillion dollars in cuts would allegedly take place after the presidential election.

Weaknesses

• It was a stark week of underperformance by the junior and mid-tier gold and silver stocks relative to their senior peers as evidenced by a weekly decline of 9.2 percent for the junior space versus the larger capitalization gold stocks which fell 2.6 percent.
• Underperformance in the junior space can largely be attributed to a loss in confidence in overall stock markets around the world to provide capital for what is turning out to be a period of low growth.
• On a risk-preference basis, investors have been more willing to add to their gold bullion exposure versus adding to equity market exposure, even in the realm of gold mining companies.

Opportunities

• Noted market historian Don Coxe believes that the gold rally “is primarily driven by fear-not greed.” He advised “gold is gradually becoming recognized as a necessary investment for those with wealth to conserve who do not assume that the political classes in the US and Europe will display sustained statesmanship.”
• Despite rising prices, precious metals demand in India, the world’s biggest consumer of bullion, continues to soar. Jewelry manufactures note that gold is likely to see further increased demand with the festival and wedding season around the corner.
• Entertainment specialist Jim Cramer recommended that gold should account for 20 percent of any portfolio. Just a small shift in investment portfolios allocations towards this weight would likely create an order of magnitude change in the gold price should investors follow his advice.

Threats

• Investor confidence going forward after the recent near panic in selling will be a headwind in the near term.
• Liabilities on quasi-government-backed debt relating to the housing bust on corporate balance sheets were bought back by the government over the last couple of years via the bailout package. Company balance sheets are relatively healthy, but this fact has been overshadowed by the central debt issue not being dealt with effectively and the continuing threat of tax increases to solve the spending problem of governments.
• While gold has performed very well as of late, investors must be cognizant that some leveraged market participants may get liquidated and be forced to sell their holdings in gold too.

Tags: Budget Deal, Central Banks, Company Guidance, Dollar Index, Exchange Value, Gold Equities, Gold Holdings, Gold Market, Gold Price, Gold Sales, Government Policy Makers, India, Market Confidence, Monetary Base, Philadelphia Gold, Price Of Gold, Royal Gold, Royalty Structure, Silver Index, Spot Gold, Theoretical Price
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Oil Plays: Short and Long-Term Oil Trades

Wednesday, March 2nd, 2011

Oil Plays: Short and Long-Term Oil Trades

by Alfred Lee, CFA, DMS, Vice President & Investment Strategist, BMO ETFs & Global Structured Investments
BMO Asset Management
alfred.lee[at]bmo.com
March 2, 2011
Recent Developments:

• Market concerns of upheaval in the Middle East have led the price of Brent crude to rise given the fear that any revolts may cause disruptions in supply. While the more commonly quoted West Texas Intermediate (WTI) has also gained, a wide spread remains between the two types of oil contracts.
• The current spread between WTI and Brent crude is in excess of three standard deviations from its normalized mean spread. (Chart A) Thus in a mathematical sense, a difference between these contracts or more occurs just 0.5% of the time.

Potential Investment Opportunity:

• Oil tends to be recognized as a “risky-asset” having a tendency to rise and fall with equity market confidence. Its recent surge is due to concerns of political uncertainty in the Middle East choking off crude supplies. Most recently, both Brent crude and WTI gains have outpaced those of oil related equities. In addition, since crude prices began surging on February 22, larger cap oil companies have appreciated, while the smaller-cap oil names have lagged. As demonstrated below in Chart B, there is a correlation breakdown between the larger cap NYSE Arca Oil Index and the Dow Jones North American Select Junior Oil Index. The differential between the large-cap and small-cap indices is partially a result of the market’s recognition that the small-cap names are higher beta names and clearly more akin to “risky assets.” Therefore, larger-cap names have been driven more by oil-beta whereas small cap oil names have been driven by market-beta.
• In addition, smaller-cap companies in the Dow Jones North American Select Junior Oil Index tend to be locally involved businesses and as such produce lighter and sweeter North American style WTI crude. Brent crude prices on the other hand are more reflective of Middle Eastern, European and African production and larger-cap oil companies tend to have global operations. With WTI recently gaining, it will be interesting to see whether market-beta or the WTI will be more of a factor in driving the price of small-cap oil companies.
• While civil unrest in the Middle East may not be resolved overnight, both Brent crude and WTI will likely outperform oil related companies for the time being. Investors looking for a short-term trade may want to consider futures-based exchange-traded funds (ETFs), such as the BMO Energy Commodity Index ETF (ZCE) which incorporates a “smart-roll” feature to mitigate some of the contango related concerns. For investors looking further out, we believe the gap between WTI and Brent crude will eventually narrow, particularly because Saudi Arabia has promised to produce any shortfall in supply. When market risk eventually comes off the table, small-cap oil companies will likely outperform large caps, as we anticipate junior oil companies to continue to price in increased merger and acquisition activity. We therefore think longer term investors should consider the BMO Junior Oil Index ETF (ZJO) and suggest investors look to both the S&P/CBOE Implied Volatility Index (VIX) and CBOE Oil Implied Volatility (Oil VIX) Indicators for appropriate entry points. See Chart C for the recent performance comparison of the two ETFs mentioned in relation to near month ICE Brent Crude.

Chart A: Brent-WTI Crude Spread of This or More is Extremely Rare Occurrence

Source: Bloomberg, BMO Asset Management Inc.

Chart B: Small Cap and Large Cap Oil Correlation Breakdown

Source: Bloomberg, BMO Asset Management Inc.

Chart C: ZJO and ZCE vs. Near Month ICE Brent Crude

Source: Bloomberg, BMO Asset Management Inc.

*All prices as of market close March 1, 2010 unless otherwise indicated.

Disclaimer:
Information, opinions and statistical data contained in this report were obtained or derived from sources deemed to be reliable, but BMO Asset Management Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment.

BMO ETFs are managed by BMO Asset Management Inc, an investment counsel firm and separate legal entity from the Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange-traded funds. Please read the prospectus before investing. The funds are not guaranteed, their value changes frequently and past performance may not be repeated.

Tags: Alfred Lee, BMO, BMO ETFs, Brent Crude Prices, Cap Companies, Cap Oil, energy, ETF, ETFs, Investment Strategist, Junior Oil, Market Confidence, Mathematical Sense, Nyse Arca, oil, Oil Contracts, Oil Index, Political Uncertainty, Risky Asset, Risky Assets, Spread Chart, Standard Deviations, Structured Investments, Term Oil, West Texas Intermediate, Wti Crude
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Gold: Euro, China and Goldman Sachs

Monday, April 19th, 2010

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Gold fell the most in two months as the SEC’s action against Goldman Sachs (GS) spurred investors rushing out of riskier commodities and into perceived safer assets such as the U.S. dollar. Futures for June delivery slid 2% in one day to $1,136.90 an ounce.

Paulson Linked to Goldman’s Case

Goldman Sachs, the largest U.S. commodity broker, is charged with defrauding investors with a financial product tied to subprime mortgages by the Security Exchange Commission (SEC). In addition, hedge fund Paulson & Co. is also mentioned by the SEC, but not charged, in connection with the Goldman Sachs matter.

Paulson & Co. is the largest institutional holder of the SPDR Gold Trust (GLD) with about 8.4% stake, whereas Goldman Sachs also holds the 11th largest stake at 0.6% in the fund, according to Bloomberg data. SPDR is world’s biggest exchange- traded fund backed by physical bullion with a record gold holding of 1,141.041 tons as of April 15.

Goldman & Paulson Massive Gold Positions

Paulson’s high-profile bets have partly help drive gold to record-high prices above $1,200 an ounce. Although no charges were brought against the hedge fund, the double whammy news weighed on gold, and prompted some concern in the commodity markets, since Goldman Sachs is a major player with massive positions in all commodities including gold, silver and crude oil.

An Overdue Technical Correction

Typically, when market confidence is shaken by events such as the SEC Goldman suit, it should spell bullish for gold — an independent store of value. However, even before the Goldman news, gold, which rallied to a four-month high of $1,170.70 on April 12, was poised for a technical correction. So, the Goldman news most likely just triggered an exit opportunity for short-term traders to lock in profits from recent gains.

Gold-Euro Affair by PIIGS

Gold futures have been in an uptrend recently and rallied more than 11% from a multi-month low in February. The metal remains near record highs in euro and pound more on account of the currency weakness, and not due to the performance of the metal itself.

Both the euro and sterling pound had declined around 6% against the dollar in the first quarter of 2010, as the U.K.’s and PIIGS countries fiscal deficit crossed the 12% mark of respective GDPs, much higher than the EU’s prescribed limit of 3%.

With investors rotating out of the euro and into alternative assets like gold and the U.S. dollar on concerns of the Greece debt crisis, the historically negative correlation between gold prices and the dollar index has been broken since last December.

Instead, gold is now trending more positively with the dollar and inversely with the euro. (Fig. 1)

Watch EUR/USD

Over the near term, gold will keep looking to the dollar/euro relationship for direction with the euro dictating gold’s price.

The ongoing Greek debt saga has been a key driver of investors risk appetite. The EU already indicated Portugal may need to enact additional measures if it’s to cut its budget deficit.

Concerns of further fiscal crisis contagion into other members in the European Monetary Union could seal the euro’s fate of a continuous downward spiral against the dollar in the near term.

However, given the mountainous US deficits, it looks likely gold could reach record (nominal) highs in dollars as well in the medium term.

Technical Indicators

The U.S. Commodities Futures Trading Commission (CFTC) report indicated speculative financial investors seem to have become increasingly reserved and have been trimming their net-long positions in recent weeks. Commercial participants, who accounted for 51.3% of open interest, held net short positions at the end of March.

A further increase in the net short position, coupled with the negative sentiment stemming from Goldman/Paulson could put the gold price under pressure and test the psychologically important $1,100 mark.

For the time being, a dip below the $1,100 should provide investors with a buying opportunity and a rise above $1,150 would serve as a profit-taking signal. (Fig. 2)

Technicals aside, gold’s long term outlook is further solidified by a couple of new “China factors.”

China Gold Demand to Double

Gold demand in China has steadily increased since 1992 accounting for 11% of global gold demand in 2009. The World Gold Council forecasts demand doubling in the next 10 years from $14 billion to $29 billion on rising jewelry and investment demand.

Currently China’s per capita gold consumption level lags most other major gold buying countries. Although China is the world’s largest gold producer, rising domestic demand for gold outstripped domestic supply by 109 metric tons last year. This shortfall creates a “snowball” effect as China’s gold industry has to rely on imports, the World Gold Council said. (Fig. 3)

Boosted By A Stronger Yuan?

Meanwhile, some analysts also think a stronger yuan could be a catalyst to spur China’s gold demand. China might revalue its currency–the yuan or renminbi–after a recent meeting between U.S. Treasury Secretary Timothy Geithner and Chinese vice Premier Wang Qishan. Some analysts argue that the yuan is undervalued by as much as 40%.

A stronger yuan could support higher gold prices as the precious metal becomes cheaper to buy. Beijing has been encouraging citizens to buy gold and silver, a rise in yuan would certainly facilitate more buying.

According to the Associated Press, China let the yuan appreciate almost 20% between 2005 and 2008 during which gold prices touched $1,000 an ounce for the first time.

Underpinned By Fear & Uncertainty

Although it would seem that the Goldman-linked SEC case single-handedly killed the price of gold last week, as discussed here, it was only a catalyst to a technical correction that was overdue.

The fact remains that in times of uncertainty, investors historically turn to gold as a hedge against inflation and unforeseen crisis since gold is one of the very few asset classes that is not someone else’s liability.

Many experts argue that gold is not an effective hedge against inflation since the then-record $873 an ounce established in 1980 should appreciate to $2,287 in terms of today’s dollar.

However, fear of any sort usually does translate into higher gold prices. One hypothesis is that the seemingly slow and steady inflation is not explicitly overt enough to cause an overwhelming fear of inflation yet. Nevertheless, the record government debt levels and monetary printing machines will most certainly heighten investor’s inflation concerns and push gold prices much higher over the long term. (Fig. 4)

Tags: Bloomberg, Bullion, China, Commodities, Commodity Broker, Commodity Markets, Crude Oil, Double Whammy, Exchange Traded Fund, Exit Opportunity, Gold, Gold Bullion, Gold Euro, Gold Futures, Goldman Sachs, Hedge Fund, Independent Store, Market Confidence, Ounce, Sachs Gs, Security Exchange Commission, Silver, Spdr, Term Traders, Uptrend
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