The spectacular rise in gold, now hovering in record
territory, has been fostered by three very different conceptions: gold as a
traderâ€™s choice, gold as a theoretical proof and gold as a historical metaphor.
For the believers in metaphor the ascent of the metal is an augury for the
decline of the West; for the theoreticians it is the only secure defense
against inflation; for the traders it is a momentum purchase not to be missed.
All three groups are buying gold and as yet, none have been proven wrong.
If we translate these speculations into currency terms the traders promise a
long position with better returns than any other investment. The theoreticians
predict a global currency system ravaged by government inflation and a
revolving cast of devalued national scripts. And the third intimates the
ultimate end of the dollar as the world reserve currency presumably replaced by
the yuan. All three foresee a continued fall in the value of the dollar.
The economic logic of the three groups of gold supporters is currently aligned
and all are profiting from the rise in prices. But it would be remarkable if
three such disparate scenarios remained in tune for long.
The East may indeed replace the West as the dominant global economic center but
it will not do so in time for the â€˜metaphorical Spenglerians' (so named for
Oswald Spengler who published The Decline of the West a long ago as 1918) to
take profit on their investment. Even if the dominance of the West has peaked
the decline will be slow and erratic and these position takers will miss their
profit levels waiting for the final collapse.
For the theoreticians or monetarists, the second group of â€˜gold bugsâ€™,
inflation will suddenly spring out of the ground like the product of so many
governmental dragonsâ€™ teeth. Inflation is inevitable; increase the money supply
and inflation follows.
The problem with this idea is current practice. With prices stationary or in
decline in many industrial economies and unemployment at a new and much higher
normal, it is hard to see how firms can extract higher prices from consumers
when cheaper international goods are so readily available. Whatever the
theoretical prospect for inflation the current empirical evidence points the
other way, toward deflation.
For the third group, the traders, theory and metaphor are irrelevant. The
global financial system is under a soothing blanket of liquidity. The central
bankers who have warmed the world with cash and who are now (we assume) very
aware of the danger of prolonged cheap credit will (we assume), sooner or
later, begin to draw back the protecting cover of liquidity. But the
reabsorption of liquidity by the banks is wholly conditional on economic
recovery. The most forthright of the worldâ€™s central bankers, Ben Bernanke of
the American Federal Reserve has stated this over and over; there is no reason
to doubt his word.
The gold buyers in this group believe the Chairman. Until the central bank
begins to tighten credit, excess cash and the pursuit of trading profit
determines the price of gold. It does not matter that the bankers say they will
tighten credit when the proper time comes, what matters is action. Until the
banks actually begin to raise rates and subtract liquidity, for them, gold is a
Of the three scenarios the first, the â€˜Spenglerianâ€™ is the most impervious to
evidence. It exists apart from factual verification or to put it another way,
it is always possible to find evidence that the West is declining. It is just a
matter of choosing the right statistics. In practical and emotional terms this
group will always be long gold, though it is in unsettled times like ours that
they do the most buying.
For the monetarists results depend largely on logic and economic equations. If
so much liquidity is loosed on financial markets it must over time (duration
unspecified) produce inflation. It is a simple monetary equation, a rising pile
of cash chasing a much more slowly rising pile of goods and assets. Over time
inflation is the end product. But inflation is not solely the product of a
balanced equation between cash and goods. Firms must be able to raise prices
and consumers must be able to pay those higher prices and those last factors
are now very much absent.
Yet economic stagnation and inflation are not mutually exclusive. If returning
American economic growth is not sufficient to reduce unemployment what are the
chances that the Fed will commence raising rates regardless of the price index?
And if on the other side of the world East Asian economic growth takes off and
forces commodity and goods prices higher those prices will shortly be felt in
the United States.
Irrespective of what the US
economy is doing the worldâ€™s markets can export inflation to the US.
What would prevent the price of oil from climbing as it did last summer if the
Chinese, Indian and Brazilian economies accelerate and that third of the world
creates its own economic cycle? Will the US
be dragged by East Asia into robust recovery?
Unknown. But the effect on the overextended American consumer and economy of
$100 oil is not unfathomable. There is no certainty that the world economy will
be dynamic enough to force prices higher in the US. But if inflation comes in the
US it will probably arrive from overseas and US domestic liquidity will have
done little to create it.
For the Fed to raise rates and by default defend the dollar US economic growth
will have to be strong enough to begin to take down the unemployment rate. This
is an entirely unsure prospect.
US consumers are tapped there has been no sign in retails sales or consumer
credit that the drivers of US
growth have resumed their seats behind the wheel. The effect of a weak dollar
on US exports may be pronounced. Shipments may increase enough to substantially
reduce the trade deficit. But the US is not an export driven economy
nor is its work force widely engaged in manufacturing. Exports may grow
appreciably without it having any noticeable effect on American unemployment.
Exports might look excellent to economists and free traders without US workers
feeling any better or increasing their spending.
Of the three gold buying groups, the monetarists and the traders are most
susceptible to Fed policy changes. But the traders are likely to act first. For
them the earliest indication of a genuine change in Fed policy will be enough
to abandon their long gold positions for profit. Monetarists are likely to wait
until they are sure the Fed will act and then wait again until there is proof
that the Fed has acted in time to prevent inflation.
And here we have the pernicious effect on the dollar. Until the Federal Reserve
reestablishes the link between economic growth and interest rates the logic of
the gold buyers is inescapable. Gold is not predicting a decline in the dollar
or the inevitable advent of inflation but it is promising that without a
vigilant Fed the first will continue and the second creep ever closer.
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Mon 19 Feb 2018
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