|
Gold prices go up when cash and bonds fail to beat
inflation. It was true in the 1970s, and it's been true again in the last
decade.
Both times, gold also beat both stocks and industrial
commodities as well. Perhaps because storing value, rather than trying to
grow it, takes precedence when the cost of living eats into your capital.
But now, from
here, what will gold prices do?
"Markets
don't expect inflation; professional forecasters don't expect inflation, and
economists who know how to do their job don't expect inflation," claims
academic economist Brad DeLong on his blog.
Never mind that
inflation-linked five-year Treasury bonds do see inflation ahead,
or that the global gold market clearly fears it. Never mind that conventional
Treasury bonds didn't wake up to the 1970s' inflation until 1980, and never
mind today's "fail" for professional forecasters on May's US jobs
data. (But hey, they were sold a pup by March and April's false readings).
And
never mind that economists-who-know-how-to-do-their-job are all too often now
in a different job, trying to run the economy rather than observe it, and
opting everywhere to devalue money at the fastest pace – accounting for
post-inflation interest rates – in well over three decades.
No, "Whichever
inflation measure you prefer, there's no reason to tighten," as DeLong's
fellow economist Paul Krugman puts it, blogging at The New York Times.
So
what if inflation goes negative – making real interest rates positive,
even if the official rate is slashed even to zero? Outside early-2000s Japan
and the global wipe-out of spring 2009, modern history offers no examples.
Both times, expert
economists urged policy-makers to cut
nominal interest rates below zero somehow, either by
printing money to excess or taxing bank deposits or generally destroying
cash, so that real rates could also stay negative.
Both times, gold rose in nominal and real terms as well.
What gives...?
Here in May 2011, there's a "disparity
developing" between industrial and precious metals, notes the latest Commodities Market Attributes
report from Standard & Poor's.
Dividing its own
S&P GSCI Industrial Metals Index by the Precious Metals Index, the agency
tracks the relative strength of useful metals against the less industrially
useful (but more socially valuable)
metals gold
and silver.
"This
ratio generally has been positively correlated with the S&P 500 [US
equity index]," says the report. Which makes sense,
because industrial demand and risk-capital will tend to move in the same
direction. But "the ratio declined again in May," says
S&P, down "to essentially the same level it hit at the end of May
2009.
"What
is disconcerting for many analysts is the fact that the S&P500 has
increased 54.23% over the same two-year period. The implication is that
extremely low interest rates and quantitative easing are likely influencing
the level of real assets. At the same time, the ratio of demand for direct
economically-related industrial assets...is not keeping up with the demand
for store of value assets."
More telling
still, S&P's Market Attributes
also prints a chart of the S&P equity index against the ratio of
gold-to-silver prices. It shows (see page 5) how a falling ratio – with
gold becoming less valuable in terms of its industrially useful cousin
– usually coincides with rising stock markets. But the gold-silver
ratio has just jumped, up from a three-decade low near 31 ounces of silver
for 1 ounce of gold to 40 and above.
"Risk-Off
and Demand Destruction," is how S&P's report sums up May 2011.
Pointing to the rising value of gold – against silver, the other
industrial commodities, and common stocks – is simple shorthand, too.
Because storing value, rather than trying to grow it, also takes precedence
when the risk to your capital is that it might vanish altogether as debtors
and businesses go bust amid a true deflation in prices.
That's
if deflation gets chance, of course, before economists and central-bankers
get to work destroying your savings first.
Adrian
Ash
Head
of Research
Bullionvault.com
You
can also Receive
your first gram of Gold free by opening an account with Bullion Vault : Click here.
City
correspondent for The Daily Reckoning in London, Adrian Ash is head of
research at BullionVault.com
– giving you direct access to investment gold, vaulted in Zurich, on $3
spreads and 0.8% dealing fees.
Please
Note: This article is to inform your
thinking, not lead it. Only you can decide the best place for your money, and
any decision you make will put your money at risk. Information or data
included here may have already been overtaken by events – and must be
verified elsewhere – should you choose to act on it.
|
