While the "parabolic surge" in the price of gold over the last couple
of months is concerning, Lloyd Thomas, professor of economics at Kansas
State University, says the rise is also worrisome over a longer period
of time.
"Gold is considered a good hedge against inflation," he said, "But the increase in gold price has far outpaced inflation, especially during the last decade."
Most seasoned investors have some allocation to precious metals in their portfolios, most often gold. They believe that such an allocation protects them, as it is a hedge, or an insurance policy, against the proliferation of paper (fiat) money by the world's largest central banks. Fiat money is not backed by real physical assets.
He noted that inflation has only picked up 2.4% on an annual basis during the last 10 years, but the price of the yellow metal has climbed more than 21% a year during the same time period.
Unless higher inflation -- to the tune of 10% a year -- is forthcoming, Thomas said gold prices are "clearly in a bubble."
As fiscal problems linger, Kingsview Financial's Zeman said gold prices will continue to gain luster, even reaching $5,000 or $7,000 an ounce over the next few years(which didn't happen).
"Debt issues in the United States and Europe are playing a huge role in why investors are buying up gold, and those are not going away anytime soon," noted Zeman. "I don't see how the United States can get out of debt without further debasing the dollar, so that will continue to support gold prices."
investors are clearly sending a signal that they are worried both about stagnation and inflation. But the emphasis seems to be more on the "stag."
The yield on the 10-year U.S. Treasury note hit a record low Thursday morning, dipping briefly below 2% before bouncing back a bit. Low bond yields are a tell-tale sign of economic malaise. Stop me if you've heard this before, but bond prices and yields move in opposite directions.
The sharp rise in consumer prices -- which can partly be blamed on Fed policies that have fostered an environment conducive to a weak dollar and commodity boom -- is worrisome.
Even if it's not technically the kind of inflation you learn about in economic textbooks (you usually need a strong job market and wage growth for that) it may just be an issue of semantics for consumers.
If you are paying more for things like gas, milk and clothing, then who cares if the so-called core CPI, which strips out volatile costs of energy and food, didn't rise as much as the overall CPI? It's always been a silly argument to ignore them. There's no inflation as long as you don't have a life?
"This isn't yet like the inflation from the 1970s. But it is above average," Barbi said.
2013
The answer to the question, why did gold fall 28% in 2013 when, theoretically, it should have risen, is that Wall Street, London, and hedge funds have turned the paper gold market into a market of speculation, where the price rises or falls, not based on the purchasing power of currencies (the hedging characteristic of gold), but on such things as whether or not the Fed will taper, what impact Iranian nuclear talks will have on oil flows, if the interest rates in the eurozone periphery are likely to rise or fall, etc.
in April, when gold prices plunged $200 in a two-day span to their lowest levels in two years. With the banking crisis in Cyprus going on at the time, gold investors feared that the island nation's central bank would have to liquidate its gold reserves in order to shore up its financial system. That change in sentiment reversed the conventional thinking that central-bank purchases would continue to support the price of gold through 2013.
further gold-price declines stemmed from increasing worries about an imminent shift in the Federal Reserve's monetary policy. For years, one of the underpinnings of the bull-market move in gold had been the Fed's aggressive moves to keep interest rates low. Yet in June, the Fed first signaled that it would consider pulling back on its latest round of quantitative easing, and even the possibility of such a move sent gold still lower, touching the $1,200 level.
One would also think that the price of gold should be rising because of a growing loss of confidence in fiat currencies. Here are some indicators:
"Gold is considered a good hedge against inflation," he said, "But the increase in gold price has far outpaced inflation, especially during the last decade."
Most seasoned investors have some allocation to precious metals in their portfolios, most often gold. They believe that such an allocation protects them, as it is a hedge, or an insurance policy, against the proliferation of paper (fiat) money by the world's largest central banks. Fiat money is not backed by real physical assets.
He noted that inflation has only picked up 2.4% on an annual basis during the last 10 years, but the price of the yellow metal has climbed more than 21% a year during the same time period.
Unless higher inflation -- to the tune of 10% a year -- is forthcoming, Thomas said gold prices are "clearly in a bubble."
As fiscal problems linger, Kingsview Financial's Zeman said gold prices will continue to gain luster, even reaching $5,000 or $7,000 an ounce over the next few years(which didn't happen).
"Debt issues in the United States and Europe are playing a huge role in why investors are buying up gold, and those are not going away anytime soon," noted Zeman. "I don't see how the United States can get out of debt without further debasing the dollar, so that will continue to support gold prices."
investors are clearly sending a signal that they are worried both about stagnation and inflation. But the emphasis seems to be more on the "stag."
The yield on the 10-year U.S. Treasury note hit a record low Thursday morning, dipping briefly below 2% before bouncing back a bit. Low bond yields are a tell-tale sign of economic malaise. Stop me if you've heard this before, but bond prices and yields move in opposite directions.
The sharp rise in consumer prices -- which can partly be blamed on Fed policies that have fostered an environment conducive to a weak dollar and commodity boom -- is worrisome.
Even if it's not technically the kind of inflation you learn about in economic textbooks (you usually need a strong job market and wage growth for that) it may just be an issue of semantics for consumers.
If you are paying more for things like gas, milk and clothing, then who cares if the so-called core CPI, which strips out volatile costs of energy and food, didn't rise as much as the overall CPI? It's always been a silly argument to ignore them. There's no inflation as long as you don't have a life?
"This isn't yet like the inflation from the 1970s. But it is above average," Barbi said.
2013
The answer to the question, why did gold fall 28% in 2013 when, theoretically, it should have risen, is that Wall Street, London, and hedge funds have turned the paper gold market into a market of speculation, where the price rises or falls, not based on the purchasing power of currencies (the hedging characteristic of gold), but on such things as whether or not the Fed will taper, what impact Iranian nuclear talks will have on oil flows, if the interest rates in the eurozone periphery are likely to rise or fall, etc.
in April, when gold prices plunged $200 in a two-day span to their lowest levels in two years. With the banking crisis in Cyprus going on at the time, gold investors feared that the island nation's central bank would have to liquidate its gold reserves in order to shore up its financial system. That change in sentiment reversed the conventional thinking that central-bank purchases would continue to support the price of gold through 2013.
further gold-price declines stemmed from increasing worries about an imminent shift in the Federal Reserve's monetary policy. For years, one of the underpinnings of the bull-market move in gold had been the Fed's aggressive moves to keep interest rates low. Yet in June, the Fed first signaled that it would consider pulling back on its latest round of quantitative easing, and even the possibility of such a move sent gold still lower, touching the $1,200 level.
One would also think that the price of gold should be rising because of a growing loss of confidence in fiat currencies. Here are some indicators:
- The growing interest in Bitcoin as an alternative to government-issued currencies. One should ask, why did the price of Bitcoin rise from $13.51 on December 31, 2012 to $754.76 on December 30, 2013 while the price of gold fell? As you will see later in this essay, the answer lies in leverage. The gold market is leveraged; Bitcoin is not (at least, not yet).
- The volatility that the Fed has caused in emerging market economies by flooding the world with dollars at zero interest is another reason the price of gold should be rising. The Fed's announced zero-rate policy with a time horizon caused huge capital flows into emerging market economies by hedge funds looking for yield. The inflows caused disruption to the immature financial systems in those emerging markets. And then, with the utterance of a single word, "tapering," all of the hedge funds headed for the exits at once. The Indian rupee, for example, which was trading around 53 rupees/dollar in May 2013, fell to 69 near the end of August, a 30% loss of value. Such behavior has stirred up new interest on the part of major international players (China, Russia) to have an alternative to the dollar as the world's reserve currency. Don't dismiss this as political posturing. It is based on irresponsible Fed policy in its role as the caretaker of the world's reserve currency. As the world moves toward an alternative reserve currency, the dollar will weaken significantly relative to other currencies, and, theoretically, to gold (and even Bitcoin).
- The loss of confidence on the part of some sovereign nations that the gold they have stored in foreign bank vaults is safe. Two examples immediately come to mind: Venezuela and Germany. In August of 2011, the President of Venezuela, Hugo Chavez, demanded that the London bullion banks that were holding Venezuela's gold ship it to Caracas. (Again, don't dismiss this as political posturing.) Despite the fact that the shipment could have been carried on a single cargo plane, it took until late January 2012 (17 months), for the London banks to completely comply. One should wonder why. Then, the German Bundesbank asked for an audit of its gold holdings at the Fed. One knows how the Fed has resisted audits from Congress, so why should a request from a German bank meet with any different result? After political escalation, a German minister was permitted to see a room full of gold at the New York Fed. In early 2013, the Bundesbank publicly announced that its intent was to repatriate its gold from the vaults in Paris, London, and New York. We have now learned that it will take seven years for the New York Fed to ship the gold earmarked as belonging to Germany in the Fed's vaults. One should wonder why such a long delay.
https://www.thebalance.com/gold-prices-and-the-u-s-economy-3305656
https://www.goldrepublic.com/news/why-gold-prices-fell-in-2008
https://www.goldrepublic.com/news/why-gold-prices-fell-in-2008
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