Gold Price is No
By James West
Nov 4 2009 10:59AM
The price performance of gold recently has all sorts of
armchair economists waxing philosophical on the idea that this is the
advent of a price “bubble”. While certainly everyone has and is
entitled to their opinion, there are other features of humanity that we all
possess, and much like many opinions, are best obscured from view.
Declaring that gold is in a “bubble”
demonstrates complete ignorance of or disregard for the fundamental drivers
of the almost ten year ascent of gold. And saying that the price is forming
a bubble implies that, like the real estate bubble, the tech bubble, and
the tulip bubble, the price must necessarily “pop” and return
to a sustainable long term average.
During each of the bubbles of recent and distant history,
the cause of the meteoric price ascents of these various asset classes were
all predicated by the same string of events.
Supply was far outstripped by demand because the public
perception emerged that the asset class in question was the ultimate asset
class at that point in time. Disproportionately high levels of capital were
directed to them, and upon the eventual discovery that supply could easily
meet and exceed demand, the bubble pops, the price declines, and the herd
mentality resumes its frantic search for the next ‘ultimate’
Homes, technology and tulips are all a product of effort.
With increased effort, more of each of these can be created. Supply can
easily be ramped up to meet demand.
Not so much, in the case of gold. The availability of
economic concentrations of gold in deposits near to the surface of terra
firma is finite. Increased effort might guarantee the temporary increase in
supply from known deposits, but each deposit is eventually exhausted, and
no amount of increased effort can bring back the gold.
Gold, for the most part, is not used up. It is fabricated
into jewellery or bullion or coins, and hoarded and preserved.
Technology, real estate, and tulips, on the other hand, are
consumed and replaced. Technology becomes obsolete, homes wear out, tulips
die and are reborn each spring.
Gold? Gold goes nowhere. Gold stays put. Gold is passed
from generation to generation in last wills and as heirloom collectors
items. Gold is recognized as a store of value that is not temporary.
The only way to diminish that is through government
interference, such as the various legislative actions that have
historically capped gold’s value at a fixed price, or if, for some
reason, humanity decided to abandon its greedy predisposition to hoard
value against future financial calamity.
The latter is just as improbable as the former.
The idea of capping the price of gold through international
agreements flies in the face of the entire concept of free markets, now the
near universally accepted preferred economic style. And the innate fear of
not having enough that is a basic element of the human cerebral
infrastructure is eternal, or at least, that’s how it seems.
So what could, for arguments sake, cause the price of gold
to plummet suddenly, thus obviating the recent spike as a bubble?
Well, the forces of supply and demand are always dominant.
If those who want to buy gold and are willing to pay the market price for
it exceed the number of those who have gold and are willing to sell it, the
price will be forced upward. Just as elementally, if sellers outnumber
buyers, the price must needs decline. So simple.
And who’s selling gold?
Well we can point to the International Monetary Funds plan
to divest itself of 400 tonnes of gold, ostensibly to finance the stimulus
of nations unable to underwrite their own economic stimulus. But just as
soon as the proposed sale is announced, India steps up to the plate to take
half. In one transaction. The largest single lot of gold made available
since the onset of the secular bull market, and a buyer is found
Russia, the economic basket case of the world thanks to its
national inability to govern itself with laws and reason as opposed to
brute force, recently announced the necessity of a sale. But that is
clearly necessitated by the national hands’ inability to refrain from
raiding its own pockets. A genetic defect, it would appear.
Who else has sufficient gold to sell, that might
drastically influence the supply/demand matrix to cause a popular
abandonment of gold? China, the United States, and various G7 nations. But
none of them are selling. Indeed, China has revealed that it has been the
principle sovereign accumulator of gold for over 5 years.
Even during and post economic crisis, the impetus was to
retain and accumulate, not sell gold.
No. The bubble we are immersed in at present is the
currency bubble. Led by the disingenuous United States, the world has
temporarily forgotten that despite the fact it is possible to print
currency easily and with abandon, the laws of supply and demand will
definitely re-assert themselves in due course. And that is what we are
seeing now with the gold price.
The confidence in a dollar printed on paper being able to
obtain a dollar’s worth of merchandise is fading with every treasury
auction. The popular perception is growing that gold is indeed a monetary
standard, and a store of value that can be trusted in both turbulent and
stable economic conditions.
There is nothing on the economic horizon that can change
this. We are in the period of descent for the American empire and its
feeble dollar. The nation is bankrupt, morally and economically. It can no
longer bamboozle the world into accepting its counterfeit currency in
exchange for trade. Only nations who are forced by their vast holdings of
the monopoly dough to entertain the notion that it has value participate in
the illusion, because the alternative would necessitate a drastic
re-valuation of their own financial integrity.
So on the supply side, there is no availability. No one is
selling. The miners are mining as much as they can as fast as they can and
still the buyers are lining up.
On the demand side, nothing but more, more and more demand.
No trustworthy currency in sight (except perhaps the renmibi, increasingly
a gold-backed currency), no asset class alternative that is comparable, no
new bubble to chase.
I suppose its good to have alternative viewpoints in media.
Its important to listen to all sides of a story. But if the issuing orifice
declaring a bubble inhabits a region below the waist, those who act on such
advice will find themselves duly smeared in good time.
Gold price bubble? Give me a break!
Wednesday, November 4, 2009
James West is the editor of
MidasLetter.com, a subscriber-based financial newsletter that alerts
readers to opportunities and threats to their financial well-being. A
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