someone refute this please, page-38

enoonmaI,

I think many goldbugs have a huge blind spot in their thinking. A brief recap first.

Shane Oliver seems to argue that the inflation-deflation balance is within bounds and likely to stay so for at least a year or two. I'd like to prove him wrong, because he's painting a lack-lustre outlook for the gold price, with no rampant inflation and no fear-inspiring instability.

Yet he has a valid point, which you seem to have enlarged on, that the monetary reserves being created by central banks aren't being lent out at a rate greatly exceeding needs. The money isn't being widely circulated, so the inflationary effect is relatively mild. This effect is widely known as “pushing on a string.” You say "this is a basic failing of most people who believe that money printing = inflation = increase in gold prices." I agree. Quantitative easing is becoming demonstrably less effective with each bout of it, and both inflation rates and the gold price have moderated. If that's all we goldbugs have to look forward to, it's no wonder if we want to ignore it. But is it?

We could focus on the complex issue of the effectiveness of quantitative easing, but I think there's a more important question, as follows. If quantitative easing is becoming increasingly less effective, and interest rates can't be lowered below zero, how come central bankers aren't concerned that high global debt levels will produce runaway deflation? How come they're not trying to mobilise additional counter-deflationary initiatives to QE and ZIRP?

The simple answer is that they are. In fact, chairman Bernanke has suddenly become quite insistent that fiscal easing will be needed, as the following quote from his latest testimony to congress demonstrates.

“...fiscal policy at the federal level has become significantly more restrictive...substantial drag on the economy this year...deficit reduction policies in current law [are expected to] slow the pace of real GDP growth by about 1-1/2 percentage points during 2013...monetary policy does not have the capacity to fully offset an economic headwind of this magnitude.”

That last sentence is a dire warning. If it's heeded, and fiscal policies are flagged to ease, I'd expect that it would increase inflationary expectations, and be discounted in the gold price. After all, the government can push on much stiffer strings than central banks have to use.

I think that fiscal policy, more than monetary policy, is where goldbugs need to pin their hopes now.