|
Why is gold in
a bull market? The answer
isn't "price
inflation", because although
"price inflation" is
happening it isn't widely perceived to be a major problem at this time. Furthermore, there was relentless "price inflation" during the
1980s and 1990s while gold was
in a bear market. Monetary inflation is part of
the answer, but it isn't the most important part because there was plenty of monetary inflation during the
20-year period when gold was in a bear market. The reversing of the US
stock market's secular
trend (from up to down) during
2000 is also part of the answer, but saying that gold is in a bull market because the stock market is immersed
in a secular valuation decline just prompts the
question as to why this should be so.
Why should a long-term gold bull market coincide with a long-term equity bear market?
The answer to the question "Why is gold in a bull market?" is related to the propensity to save. When there
is an increase in uncertainty and/or the perceived
level of economic/financial-market risk, people naturally want to save more and spend less. This is especially the case after an economy-wide inflation-fueled
boom turns to bust, because in this situation debt levels will
be high, many investments that were expected to generate large returns will be shown
to have been ill-conceived, and it
will be clear that much
of what was generally believed about the economy was completely
wrong. The public's first
choice in such circumstances would be to hold more money, but central
banks and governments respond to the factors that are prompting people to save more by taking actions that reduce the value of money.
Policy-makers do this because they are operating from the Keynesian playbook, in which almost everything is backward. In the real world
an increase in saving comes at the beginning of the economic growth path and an increase in consumption-spending
comes at the end, but in
the Keynesian world the economic
growth path begins with an increase in consumption-spending.
Moreover, in the back-to-front world imagined by Keynesian economists an increase in saving is considered
bad because it results in less immediate consumption.
So, things happen that make the public want to save more, but the
central planners then say "if you save more in terms of money we will punish
you!" They don't actually say "we will punish you",
but they take actions that guarantee a real loss on cash savings. However, the actions taken to reduce the appeal of saving in terms of the official
money do nothing to reduce
the underlying desire for
more savings. In fact,
the actions tend to further undermine
the economy and create
more uncertainty, thus leading to an even greater propensity to save.
That's where gold comes in. People want to save more, but they can't save in terms of the official money unless
they are prepared to lock-in a negative real return
on their savings. They therefore opt for the next best thing: gold. Gold is almost as liquid and as
transportable as money, but its supply
is essentially fixed. Gold also has a very long history as a store of
value and as money, so even
though it is presently not money it is a good alternative to
cash.
Long-term gold bull markets
can therefore be viewed as periods lasting 10-20 years when the public has an increasing
propensity to save and when the actions of the authorities
make it increasingly risky to save in terms of the official
money.
The best ways that we know of to illustrate gold's major trend are via long-term
charts of 1) the Inflation-Adjusted
(IA) gold price, 2) the gold/commodity
ratio (gold relative to the Continuous Commodity Index (CCI)) and 3) the gold/Dow (or gold/SPX)
ratio. The first two are displayed
below.
"Price inflation" was widely
viewed as a big problem during the 1970s, but
if the gold bull market of that
decade had been primarily driven by "price inflation" then the
gold price would not have
made huge gains in inflation-adjusted
terms and relative to the prices
of almost all other
inflation hedges (other commodities, for example). It
made huge real gains because
there was an increasing propensity to save, and because in addition
to there being a general expectation that holding the official money would
generate a real loss there was uncertainty
regarding the on-going viability of the entire monetary system.
"Price inflation" has not been widely viewed as a big problem over the past 10 years, but it is clear to many
people that the Fed has been playing
fast and loose with the US dollar. There are also
obvious questions about the long-term viability of the euro, the
main fiat-currency alternative to the US$. At the same time, economic progress has slowed, investments in stocks
and real estate seem a
lot riskier than was the case several years ago, and nominal interest rates have been forced
down to levels where real
returns on monetary savings are certain to be well into negative
territory even with annual "price inflation" of only a
few percent.
Unless the world's major economies miraculously return
to health despite policy-makers doing the
opposite of what they should be doing,
or policy-makers start doing the opposite of what they have been doing, the propensity to save will remain in a long-term upward trend and savers will be
forced to consider liquid alternatives to cash. That is,
gold's long-term bull market will remain
intact.
|
|