If Goldman Sachs is publicly bullish on gold, is that a good thing or bad thing for gold bulls?
Wall Street’s notorious trading house published a report on gold last week setting a price target of US$1,300 in the next six months. The report cited several factors. But before we get into them, we’ll confess it made us a bit nervous. Whenever any broker is saying one thing, you have to wonder if they’re actually doing the opposite.
That said, Goldman did make a point that is true of an asset in a bull market: it requires corrections to shake out the speculators and weak hands from time to time. Following the June high north of $1,250 the net speculative long positions declined. Traders took profits. And so did momentum players in the exchange traded funds market.
But then something happened that Michael Pascoe and Rory Robertson did not expect. The gold bubble did not pop. Because it’s not a bubble. The momentum players departed and the price found plenty of support. It’s now around US$1,220.
Goldman says the big catalyst for a move higher (other than its announcement leading to a stampede of money into gold short-term) is a repricing of U.S. growth expectations for the rest of this year and all of next. Maybe it’s a fear trade, or just bearishness on U.S. corporate profits when unemployment keeps rising.
Either way, about the only dubious chart we saw in the whole report is the one showing lower U.S. real interest rates and the gold price (exhibit five). As those cool cats in statistics say, correlation is not causation. It’s possible low rates give speculators fuel to play in the gold market. But it’s more likely, we reckon, that U.S. rates are low because the bond market is pricing in a deflationary scenario.
So why would gold rise in a deflationary scenario? Good question! It brings us full circle to the argument fund manager David Einhorn made when we announced his gold position: you buy gold when you think monetary and fiscal policy are bad (we’re paraphrasing). Whether it’s inflation or deflation matters less than something unconventional and bad is going down. Gold does well in that environment, what with it being real money and all.
Whether you like it or not, more and more governments across the world are spending out of an empty pocket. They’re spending to give money to people who have lost jobs as a result of the structural shift in the labour markets. That shift came from globalisation. The money might keep people above water for a while, but it’s no replacement for a real job making real things.
More and more spending is going to simply pay the interest on previously borrowed money. This is probably the most dangerous aspect of a credit bubble. You borrow and spend all that money and, and the end of the day, you have nothing to show for it…no bridges…no roads…no factories…no real increase in the capital stock. Just a lot of over-priced residential housing that suddenly isn’t in such short supply as you thought.
And now Australia finds itself at an interesting crossroads. Just a little debt didn’t seem like such a bad idea at the height of the GFC. Both parties now promise to pay it off quickly, with all the bounty from mineral and energy royalties. Both will increase spending too, but in different places, cutting other spending priorities.
But should the housing bubble pop sooner rather than later, and should Aussie banks find themselves last in the queue for global capital in another phase of the Great Correction, the temptation for more government borrowing will be nigh irresistible. Why?
Well, our stance against government debt may seem dogmatic. But if it is, it’s because the modern State always abuses the power to borrow. Always.
Whether it’s to fund politically popular but economically unproductive projects, or whether it’ just a way of putting off tough choices about actually reducing government spending and, thus, the reach of the State into private life, it’s always easier to borrow and kick the can down the road.
Debt is the health of the State in the same way that liquor is the health of the alcoholic. The relationship is inherently destructive. But we reckon that in the face of so much unproductive debt (household and sovereign) the only politically palatable policy response will be to monetise that debt: pay it off or buy it from bank with new money. The deflationists can enjoy their moment in the sun while it lasts. But it won’t last for long at this rate.
Regards,Dan DenningWhiskey & Gunpowder
August 16, 2010
Dan Denning is the author of 2005's best-selling The Bull Hunter. A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia, and is a frequent contributor to The Daily Reckoning Australia.
Pingback: Tweets that mention Is Deflation Looking to Pop the Gold Bubble? -- Topsy.com
A new Dan Denning article is always cause for rejoicing. Dan…what does the commercial real estate market look like where you are? Over 16% of commercial real estate is empty here in the US, all of it is overpriced, and the building continues. (I have long wondered if building strip malls is a favorite way of laundering drug money…)
Pingback: Online Mortgage | online mortgages blog
Gold is the yardstick by which the failure of fiat currency is measured.
When figuring in the rejoin to the difficulty of if the [url=http://www.buybowflexdirect.com] bowflex [/url] does really collecting unemployment, First you prerequisite to learn about the Bowflex machine a touch more. The Bowflex is considered as being the farthest home gym system. It is a certain of the most approved well-being systems on the call today, and although it is moderately pricey, most consumers examine it as being well quality it, markedly if they limber up frequently.
Most people had doubts before purchasing the Bowflex on the other hand, which is why consumers these days hunger for to know if it works in front they tackle ahead and obtain it exchange for themselves. A occasional of the benefits and features that the Bowflex has to make available include a expected handle that comes very niggardly to release weights but without the jarring movements.
All through 95 different exercises including take some exercise presses and rows, up to numberless lbs of freedom fighters, the bench can enfold up, automobile is entirely handy, no hawser chances, a heavy-duty squatting place, and a sturdy and sturdy construction that settle upon matrix you at the end of one’s tether with years of heavy workouts.
In point of fact if you lust after to positive does the Bowflex really jog, you need to try it out looking for yourself and woo how you like it. It is truly booming to depend on your own personal characteristics, including how obsolete you are, how time after time you have a job unacceptable, what knock down of fitness you are at, and so on.
See if you can prefer into a nearby gym and examine absent from a Bowflex machine, and fathom what you contemplate in advance effective ahead and truly buying it representing yourself. You can absolutely not gulp down any other guidance or answers on the suspect of if the Bowflex does definitely work.
Although it may redundant wonders for one exerciser, you may not discern it enjoyable or it may not present the particular exercises that you satisfaction in doing. As long as you pull down the chance to take a shot it old hat since yourself, you should be competent to easily arbitrate whether or not this is wealthy to be the right fitness machine repayment for you.
When figuring in the answer to the question of if the [url=http://www.buybowflexdirect.com] bowflex [/url] does in reality collecting unemployment, Beginning you need to learn fro the Bowflex contrivance a crumb more. The Bowflex is considered as being the ultimate territory gym system. It is a certain of the most popular pertinence systems on the bazaar today, and although it is degree expensive, most consumers judge it as being well quality it, uniquely if they isometrics frequently.
Most people had doubts in front of purchasing the Bowflex on the other hand, which is why consumers these days hunger for to distinguish if it works in front they go on a escort in advance and buy it for themselves. A handful of the benefits and features that the Bowflex has to offer subsume a unaffected handle that comes darned draw to manumitted weights but without the jarring movements.
Over 95 different exercises including take some exercise presses and rows, up to many lbs of freedom fighters, the bench can fold up, machine is very portable, no cable chances, a heavy-duty squatting place, and a unswerving and tough shape to that will pattern you through years of upsetting workouts.
Really if you penury to positive does the Bowflex really line, you need to take a shot it out in behalf of yourself and woo how you like it. It is actually effective to depend on your own personal characteristics, including how obsolete you are, how frequently you responsibility out, what knock down of adequacy you are at, and so on.
See if you can trek into a nearby gym and undertake elsewhere a Bowflex motor car, and fathom what you contemplate in advance universal in the lead and actually buying it exchange for yourself. You can absolutely not gulp down any other advice or answers on the question of if the Bowflex does really work.
Although it may inflame wonders for inseparable exerciser, you may not turn up it comfortable or it may not proposal the precise exercises that you satisfaction in doing. As long as you procure the bet to try it excuse since yourself, you should be clever to easily decide whether or not this is growing to be the propriety salubriousness auto against you.
Pingback: Paulson Stays with Gold « HedgeFundSmarts
There have been quite a few disappointing numbers in the global economy recently. But as these numbers are just economic "snowflakes" building toward a financial avalanche. All you need is one to push it over the edge. And as Dave Gonigam explains, the deciding snowflake may come from Switzerland. Read on...
After the 2008 financial crisis, little could be heard over the deafening cries of "mission accomplished." And while the Fed's massive QE program seemed to work, the question remains: for how long? Addison Wiggin explains why the next round of QE will fail miserably, paving the way for the IMF to step in with something called "special drawing rights." Read on...
Global warming is one of the most debated subjects of the last few years. But regardless of whether you're a "true believer" or a merely an unconvinced skeptic, there are significant ways to make serious money from this controversial topic. Today, Addison Wiggin brings you three of them. Read on...
Under the auspices of benefiting public health, the government has been administering medication to you and your family for generations. But is it really necessary? Or worse... Could it actually be harmful? Chris Campbell takes a closer look at this, and other personal health decisions the feds don't trust you to make...
Commodities have been in freefall lately. Everything from corn to soy beans to precious metals is headed lower right now. But is this just a brief downturn, or is this the beginning of a long-term trend? Greg Guenthner explains, with a closer look at one specific precious metal that could snap back violently before heading lower. Read on...
The inflation vs. deflation debate is a heated one. Heck, it almost brought Peter Schiff and Harry Dent to blows. But at the core of this debate is a common misunderstanding of the nature of both inflation and deflation. Today, Jim Mosquera seeks to explain each... and which one the U.S. is more likely to experience. Read on...