While every asset always has two aspects to it in a debt based society (with the exception of gold which is nobody's liability) gold still has a price and that price is a reflection of the value of the energy that goes into mining it. While it is true that gold is priced in US Dollars the corollary is also true that the US Dollar is also priced in an ounce of gold. Right now we are seeing that change as gold has left the trading range and broken out to all time highs.
But there are times when the gold
il ratio swings heavily in the favour of gold and this tends to be when energy prices are falling. Do not look at the pump price or electricity tariff for evidence of energy prices falling because these are lagging indicators. A better indicator of the present glut of energy is the share price of the energy companies like Whitehaven or Woodside declining as this is a real time indicator or a forward indicator. Contracts are being renewed at lower prices or lower volumes or lower prices and lower volumes or sometimes not renewed at all. In short, at the moment there is an energy surplus and the gold miners are getting higher prices for their output. This translates into lower AISC and that means more after tax profits for the shareholders. It is a process but it is also growing trend and this is going to attract investment in the sector.
As for the gianormous bubble in US equities there are several forces at work there. One is big capital seeking preservation from government debt. Many now recognise that the debt cannot be repaid and they do not want to be left holding the bag by holding government bonds. They know that government debt will fall to zero now that it cannot be repaid. They just don't know when - but moving early is better than being too late so they are moving now. But hedge funds are also pumping the bubble as that is how they outperform the market. They are the real source of the froth on top of the wave of offshore capital flooding into the US stock market. And finally, there are the ETF's that are also investing in the US stock market. ETF's have never been properly tested in the stress of a market meltdown. This is because ETF's are only now ubiquitous in the world of finance whereas they were exotic prior to the GFC.
Will there be a correction in the financial markets? Everybody is expecting some sort of a reaction soon and the big question is how severe any correction is likely to be. My guess, and it is only a guess, is that it will be sufficiently scary to make a lot of people run to bonds and the long bonds in particular. This will be an illusion of safety and after the panic the market will once again reject the long bonds as inflation returns. This will have to be the ultimate bull trap as the big funds unload their unwanted long bonds on the suckers. Of course, my prediction will be wrong if we get deflation but I think that it is too early in the process to be getting deflation. We will know before the year is out which way it is going to go but if it is inflation then gold will be king - but before that it is going to be sold off to cover margin calls.
It is indeed ironic that the shares of the gold miners will do their best in a deflation because the gold miners are mining base money. In a really severe deflation all of the derivative forms of money (bank money and leveraged debt) collapse back into the base money (gold and silver bullion and the circulating currency notes) because the debtors default on their loans. Less severe deflationary episodes leave some of the bank money intact. In the post-1929 deflation the shares of the gold miners soared because of this.
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