Dear Alasdair,
I'm a great admirer of your work. However, there are a few points where I fear the gold bugs are mistaken (sacrilege to say it on this site perhaps!). I would very much like to be proved wrong with strong arguments.
First, the causes of the gold bull run since 2002. An article freely available on GMO's website ("Present and Emerging Risks to the Gold Trade", https://www.gmo.com/Europe/MyHome/default) makes the point that gold's appreciation has coincided with the rise of the Asian middle classes who are much more enthusiastic than the West about gold for cultural reasons etc. It has been less about money printing, or debt accumulation however irresponsible that has been. CitiFX recently drew some interesting charts showing the relationship between govt debt and the gold price and extrapolate to v high levels because debt is out of control. (http://www.zerohedge.com/news/2013-08-29/citi-asks-how-high-can-gold-ultimately-go) But correlation isn't causation. We all know that the statistics are made up and understate inflation, but it hasn't taken off yet in a way that would justify gold's rise. In fact TIPS implied inflation is dropping a lot. It therefore follows that if there is a major accident in emerging markets, demand coming from the rising middle class will eventually be staunched, impacting the gold price.
This effect might be countervailed in the short term by the Indian and Indonesian experiences which have led their inhabitants to seek out gold as a store of value as their currencies drop, profiting at the same time from the Central Bank April smashdown.
Second, the root causes of inflation. Another very interesting paper by James Montier also of GMO analyses the causes of hyperinflation, and makes the point that the MV=PQ relationship, ie quantitative theory of inflation, is too simple. Hyperinflations have more often arisen from supply side shocks like wars or collapses in key commodities that have notably affected the exchange rate. Money printing isn't the only game in town, and fiscal profligacy may only be part of the story. Until there is such a shock, hyperinflation is unlikely in US and UK, and in Japan (although this has become such an extreme case that the shock may come sooner rather than later). In the Eurozone, however, such a shock could take place if it falls apart and smaller countries might be tempted to allow inflation that would then get out of control. This may explain Germany's attempt to secure its gold.
Finally, emerging markets. If a collapse in emerging markets occurs, then an RMB devaluation becomes ever more likely. If that happens, it will set off a deflationary wave across the world as per the 1937 relapse. This argument is well summed up by Ambrose Evans-Pritchard of the Daily Telegraph:
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10272285/Emerging-market-rout-is-too-big-for-the-Fed-to-ignore.html
Evans-Pritchard also illuminates the Fed's incompetence in tapering, but reaches different conclusions to yours:
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10144451/Risk-of-1937-relapse-as-Fed-gives-up-fight-against-deflation.html
The question to me therefore is whether we can expect the following:
Short term - gold up
* “Technicals” looking good for gold, following the April coordinated paper dump, and with hedgies very short, although less so than a few weeks, lack of physical supply GOFO negative etc etc, points that you and many other commentators have made in the media recently.
* In the first instance, emerging market devaluations (espec RMB and INR) and gold becoming a flight to safety.
Medium term - gold down
* In the second instance, EM economic slumps and devaluations will curb purchasing power, hitting gold demand.
* EM reserves decline reducing a key potential demand source.
* Fed tapering incompetence leads to rising bond yields crushing the "recovery". Deflation ensues.
Long term - gold goes to the moon
* Inflating away government debts will become the modus operandi
* The Eurozone may break up, creating a massive supply shock.
* So eventually gold will shine becoming the true store of value.
But we might have to wait a while…
Any thoughts?
Regards Commenté il y a 4091 jours |
