Gold, and we produce lots!!Is gold really the Fed's guilty treasure?
On the subject of gold, newsletter editor Dennis Gartman recently put forth what I thought was a preposterous observation about my favourite beneficiary of that idea. I don't often respond to commentary that is contrary to my own views, but since Gartman's opinions tend to get a lot of attention, I thought I would offer my own side of the debate.
Gartman stated: "Finally, we suspect that Federal Reserve officials all have gold on their Bloomberg or Reuters terminals in their offices and are watching gold a bit more closely now than in the past. That is, we suspect that Fed officials will view gold trading above $1,250 as a sign that they are too easy and should tighten policy a tad, and shall view gold at or below $1,150 as a sign that they are too tight and should ease."
Federal Reserve Chairman Ben Bernanke has already admitted he doesn't quite understand gold. (Read this Wall Street Journalblog entry for those comments.) To the extent he does understand it, I think the Fed would cheer gold trading over $1,250 as a welcome sign that perhaps "deflation" wasn't here after all. But to think that Fed heads would even consider tightening -- raising interest rates -- as a result of gold trading at a certain price is absurd.
They are not about to do anything to disrupt the U.S. economy -- period. They don't care if gold is signalling more inflation. They want more inflation. So I think Gartman's line of logic is completely off base.
Wait, gold is money? That's heavy, dude
As to why gold has been climbing of late, the Aug. 21-22 weekend edition of The Wall Street Journal ran the article "Rethinking gold: What if it isn't a commodity after all?" that illuminates a critical but often-overlooked point.
Jeff Opdyke explains in the column that gold is not necessarily an asset that follows inflation or deflation. Instead, citing Paul Brodsky, a principal of QB Asset Management, Opdyke maintains that gold is in fact a currency -- the world's oldest -- and one "whose daily price is a gauge of the market's concern about the 'potential diminishment' of the purchasing power of the dollar and other paper currencies."
This is a view I have stated myself many, many times.
Opdyke goes on to note: "For investors convinced U.S. lawmakers and central bankers will successfully manage the budgetary woes and the massive unfunded liabilities of Social Security and Medicare, then gold is overvalued in the long term."
I might add that if we all believed the U.S. government (including the Fed) could thread the eye of a needle and solve all our problems, none of us would need gold.
Opdyke continues: "If, however, you worry the U.S. balance sheet is irreparably damaged, then gold currently reflects the likelihood that a weak-dollar trend still has years to run as the U.S. struggles with its financial mess. Investors -- and consumers -- looking to preserve their purchasing power will gravitate toward gold, since its quantity isn't easily manipulated."
In fact, the quantity of gold cannot possibly be manipulated, though it can be increased at whatever rate miners can find new deposits and yank them out of the ground.
The upshot was that with central banks from India, Russia and China already buying gold, sooner or later South Korea would have to as well. However, a former head of the Bank of Korea's reserve management department, Lee Eung-baek, threw cold water on the idea.
In his view, gold "offers little value," and, more importantly, he stated that gold "isn't the trend." (I guess the nine-year quintupling of the price doesn't count.) He went on to elaborate on that brilliant bit of investment wisdom: "We follow the big trend. . . . Out of more than 200 nations, how many countries have bought bullion?"
This is just textbook herd behaviour, and while Lee is no longer with the Bank of Korea, it doesn't take much imagination to believe that mindset is still there. So somewhere down the road, after most other countries have purchased gold, South Korea will, too -- that is, once enough banks have bought in and pushed the price high enough to make it safe.
It is remarkable that while people love discounts when they are shopping for goods and services, when it comes to asset prices, they feel comfortable only when they have climbed high enough to be "cheap" enough to buy.
At the time of publication, Bill Fleckenstein owned gold.