http://www.kitco.com/reports/goldenbar/28May02BriefPF.htm
The 911 Scapegoat
28 May 2002
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Some people
figured we were under the wrong impression that there was a war going
on or something in the business of money with last
week's title, "Gold
Bulls Unite." Hah.
Keynesianism - you can fool all the people
all the time (people are irrational anyway, subject to the "fetish
of liquidity" and "animal spirits")
Rational Expectations - you can never fool
anyone, even a little bit
Austrianism - you can fool most of the
people some of the time but it will come back and bite you
- Robert Blumen
Let me clear that up for those puppies
right now: you bet there is, but gold
bulls unite was simply "descriptive" of what has been happening. Isn't
it? Just doing my job. Babies. They're probably short.
For those unacquainted with monetary history
or the relationship between capitalism and gold, it is also a jab at Marx's
"workers of the world unite" plea. Yes, gold and money happen to be smack
in the middle of a war between capitalism and socialism. If you don't
care or believe us, change the channel, because the rest of our analysis
discounts it.
Is
gold going to correct now? We don't know? I don't think so however. Not
if its rising momentum is an indication of anything. Not if the US dollar
index falls through 112 in the short term, and certainly not if it falls
through 108, where dollar bulls guard primary bull market support.
Gold prices have certainly far from reached
a reasonable revaluation relative to their fundamentals in our view, so
whatever corrections there will be, we expect they'll come when we least
expect but also that they will continue to end before we generally expect.
Sentiment is far from too bullish at this juncture to claim an end to
what is unfolding today. The dollar is fighting for its life in Forex
markets as our governors try and figure out how they can keep the inflation
away from gold. So far, there hasn't been much of a bounce. Dollar bulls
are still pitted against the ring wondering when round 1 will end.
At various points in the not too distant
future I'd bet there are going to be concerted attacks at the gold market
by its opponents. I've tried to come up with some plausible angles that
the banking community supporting the dollar might attempt, but have concluded
we aren't likely to see them until the momentum dissipates in the market.
Reg Howe cleverly anticipated one: a potential
cancellation of the Washington
Agreement on gold signed by 15 European
Bankers in 1999, which was seen as capping further sales of gold at the
time by the global banking industry.
Underlying this potential PR bomb (favoring
the dollar) is the debate about whether it would work or not. Of course
it will, for a while, at least until investors really begin to understand
the nature of the gold market's ascent today. But in the end it wouldn't,
and would only aggravate the supply & demand imbalances already boiling
beneath the surface. In theory it should actually increase the speed by
which the market rejects the bankers' notes as money altogether. But all
of that depends on investor's perceptions of the truth.
The truth is that the banking system needs
its gold if it wants its notes (currency) to stay competitive with gold
on the free market, as money. They would not have the nerve to act in
contempt of this truth except when confidence in the reserve currency
at least is strong, and when they think they can control the process.
But today, the key players, which have shared the risk in this, have grown
weary of bullion banker's hedging ideas, not to mention the fact that
confidence in the dollar is undergoing a big test right now.
The truth is "probably" that the Washington
Agreement was related to the launch of the Euro, and was intended as a
self-regulated measure that would prevent a further competitive devaluation
of their gold reserves. It would be a hair-brained scheme to believe that
by canceling the W.A. they could inspire support for the Euro.
Or it would be motivated by US interests
trying to support a strong dollar/euro rate.
Anyway, concerns about an increasing tendency
to war haven't been dispelled, and I don't know that Terror fears in some
US cities have vanished. This is seen as one of the main drivers of recent
investment interest for gold in the US. It has been. But here is the thing.
Analysts that have been bearish on gold are beginning to explain this
as the reason for gold's comeback, blaming September 11th and subsequent
reports of growing fear in New York. Accordingly, it must seem as if the
gold market has been forecasting just this. Thus, if global terrorism
came to a halt, gold prices should fall. Whew, then they could all be
right.
For, there could be no other reason to
be bearish on the dollar could there? It's the same thinking that leads
investors to conclude the only reason the stock market fell in September
was due to the terrorist bombings, as if it would have went up without
that event. There were plenty of reasons the stock market was going to
fall anyway.
But some analysts always pick the explanation
of an exogenous event as if you could neatly chart the history of the
market according to certain such events through time.
Whether it is deliberate or not we can
only speculate, but one of the ways that the banking community might fight
the rising gold tide is through propaganda like this, where professionally
designated "economists" pin the blame neatly on 9/11.
The very convenience in pinning the blame
on exogenous events is their temporary nature. In other words, once they
go away everything is back to normal. Or so it is hoped.
Whatever one thinks, however, it can't
possibly be argued that the closer to the truth he or she is, the better
they'll do with their money. The moral of the story is to think again
before pinning the blame for a collapsing economy and rising value of
gold on September 11. The explanation we prefer is that the (global) economy
is suffering from an inflation breakdown in the United States. In the
one case, the investor may see the "temporary" fear and terror as a buying
opportunity for dollar assets. In the other case, investors' confidence
in dollar assets is far from bottoming out.
(If you're not sure of
what we mean by the term "inflation breakdown," we've written a summary
of that idea at: Inflation
Breakdown Nears)
Before choosing sides however, we recommend
that you eliminate from your reading list any articles or essays written
by past or present employees of the Fed or perhaps even any major investment
bank. I can already tell you that in each and every one of those the main
explanation for the deteriorating economy and rising gold values is going
to be related to the war on terror.
Not one of them is likely to blame the
government and bank's inflation policies for a declining return on financial
assets (as in who do we blame for the bust side of any monetary boom),
and now the waning confidence in the dollar. But they will be quick to
list several problems in the economy today from bad loans to rising default
rates to contracting expenditures by business as if they weren't just
the symptoms of too much money in the 1st place.
Simply making that connection should illuminate
the real reason for rising gold prices today: investors are losing confidence
in the management of the inflation agenda, or in other words, support
for the dollar to date. And all of this began long before last September.
Inflation expectations are ever-present,
but the question is where will they show up next? Bankers and the government
prefer them to show up in asset prices.
Investors today need to determine how inflation
is affecting the valuation process. They are challenged to do what every
monetary historian knows they cannot do: predict how the inflation will
manifest. It's manifesting in gold today for many reasons, but foremost
is the loss of confidence in US dollar denominated assets, and the shrinking
US dollar investment premium. All of which, in our view, were set into
motion long before 9/11.
[Inflationism] is, technically
regarded, bad policy, because it is incapable of fully attaining its
goal and because it leads to consequences that are not, or at least
are not always, part of its aim. The favor it enjoys is due solely to
the circumstance that it is a policy concerning whose aims and intentions
public opinion can be longest deceived. Its popularity, in fact, is
rooted in the difficulty of fully understanding its consequences - Ludwig
von Mises, The Theory of Money and Credit, pp 251
Gold's
recent rise began in May 2001 just after the FOMC initially slashed borrowing
rates to keep asset values from devaluation (we don't need to prove that
they target asset prices; to believe they don't is preposterously naive)
and the consumer from saving. The Dow had just dropped 1900 points or
so and the US dollar was faking us out with a small topping pattern near
prior highs.
At the time, dollar bulls worked hard
channeling participants' inflation expectations towards asset prices,
for the dollar turned to make a marginal new high in July after the Dow
recovered all of its prior losses.
Yet gold prices, while correcting, did not fall to new lows as most every
mainstream analyst expected. This we saw as bearish for the dollar.
Since then, and for the past year in fact,
we've been writing about the visible inverse relationship between gold
(including gold shares) and dollar assets.
Now as the more conspicuous drumbeat of
global wars and conflicts rises, mainstreet is suddenly flooded with geniuses
claiming to have epiphanies about the nature of the rise in gold this
year, that it must have been discounting war and fear all along, and suggesting
that it is temporary because it is
only driven by exogenous, unpredictable events. What can we say about
that except that the same analysts that couldn't see it coming now say
they've figured out why it's here, and why it will end.
Anyway, we'll leave you with a highly controversial
thought to which I don't know the answer. Why is the terrorism such
a convenient scapegoat?
