Discussion in 'Economics' started by wilburbear, May 16, 2013.
Your thread title referred to looming deflation, however the article does not use that word, nor refer to the concept.
Is deflation your rationale for the decline in the price of gold, or are you misrepresenting the contents of the article?
Worldwide price deflation - world wide currency appreciation- would of course lower the price of gold, however as m22au points out there is no mention of such deflation in the article. Most likely, a sell-off in gold simply suggests that some appreciation of the dollar relative to other currencies is expected--since gold is priced in U.S. dollars. And also, since gold has already seen a considerable run-up, there are bound to be some who are worried about hanging out too long at the trough. Coincidentally, an appreciating dollar relative to the Euro and Yen should also help stabilize equity prices in dollars and even bring them down some.
Personally, I am expecting continued very slow strengthening of the dollar relative to the euro, as I think the Europeans will eventually be forced to adopt U.S. style easing, as austerity measures are counterproductive when faced with a recession. The latter measures just put more people out of work, lower consumer spending, and reduce revenues, making deficits worse! Keynes understood that, and most economists today understand that. But there will always be some around who insist on clinging to this or that economic theory rather than doing what works in practice.
Those who want to cut government spending during times of high unemployment, and I daresay some even what to go back to the gold standard -- a ridiculous impossibility-- really haven't a clue. They don't realize that cutting government spending in a recession makes the recession worse, and they certainly do not understand that the U.S. did not choose to go off the gold standard, it was forced to do so because it became impossible for the U.S. Central bank to continue to control the price of gold. Keynes foresaw these difficulties, and realized that selecting a single currency as the reserve currency based on a gold standard would eventually become unsustainable. That is, of course, what happened.
inflation is the likely the precursor for the sell off in gold. as interest rates rises it becomes costlier to hold non interest bearing gold,
Gold historically works well in both inflation and deflation. What's killing gold is extended periods of (even if only seemingly) stable growth.
"inflation is the likely precursor..."???????????????????????
You might have been correct had you written: "gold is traditional hedge against inflation." When you expect inflation you buy gold, not sell it.
Not always. Gold is not a great inflation hedge, IMO except that it is a very good hedge against significant or hyper inflation (currency devaluations). Real interest rates tend to be the real catalyst IMO. Also, as someone previously pointed out gold responds well to some deflationary scenarios as well.
Gold has been a means, over the long haul, of preserving buying power. But the gold market, even more so than other commodities, is subject to positive feedback: Your neighbor tells you that George Soros bought gold and that he bought some too; you see the price going up; you notice many people buying gold; you hear ads for businesses wanting to buy gold; people on the radio are telling you that your currency is going to collapse, and you had better start stock piling gold; well-dressed, intelligent looking people are on the internet are telling you about the coming calamity. They urge you to buy gold. Your neighbor tells you how much the Krugerrand in his safe has gone up in value. You decide to buy some gold. The price goes up further, and the further it goes up the more people want to buy it; the more certain they are that the calamity is just around the corner. Otherwise why would the price of gold just keep on going up! They are very glad they were smart enough to buy gold.
Soros, as a speculator in gold, as opposed to someone buying gold, canned tuna and ammunition, will know if the price is far beyond what can be justified by inflation -- currency devaluation -- in his particular time frame. In a word, he is an expert at identifying market bubbles. He will know if gold is in a bubble, and how inflated the bubble is. But he will not know when the bubble will burst. He may decide that his risk of holding is increasing relative to further gains that may be made. He may decide to get out.
Even though no one, not even Soros, can be certain about the future, it is possible to know with quite high probability that certain events will occur in the future. Sadly, it is usually not possible to know when these events will take place with other than very low probability. Worse yet, it is very easy to misjudge how volatile a market will be in the future. You can be right on direction but very wrong on volatility.
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