Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19
US China War - Thucydides Trap and gold - 16th June 19
Gold Stocks Bull Upleg Mounting - 16th June 19
Gold Price Seasonal Trend Analysis - Video - 16th June 19
Fethiye Market Fruit, Veg, Spices and Turkish Delight Tourist Shopping - 16th June 19
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19
The Privatization of US Indo-Pacific Vision - Project 2049, Armitage, Budget Ploys and Taiwan Nexus - 12th June 19
Gold Price Breaks to the Upside - 12th June 19
Top Publicly Traded Casino Company Stocks for 2019 - 12th June 19
Silver Investing Trend Analysis - 12th June 19
Why Blue-Chip Dividend Stocks Aren’t as Safe as You Think - 12th June 19
Technical Analysis Shows Aug/Sept Stock Market Top Pattern Should Form - 12th June 19
FTSE 100: A Top European Index - 12th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

How Could Gold Bugs Have Been So Wrong in 2014?

Commodities / Gold and Silver 2015 Dec 30, 2014 - 12:32 PM GMT

By: John_Rubino

Commodities

Twelve short months ago, the immediate future looked like a lock. Overvalued equities had to fall, ridiculously-low interest rates had to rise, and beaten-down precious metals had to resume their bull market.

The evidence was overwhelming. Debt in the developed world had risen to $157 trillion, or 376% of GDP, by far the highest level on record and clearly unsustainable. Long-term US Treasury rates had been falling for literally three decades and despite a recent uptick were so low that the only way forward seemed to be up.


Europe and Japan were drifting into recessions that could easily morph into capital-D Depressions. The eurozone would fragment, Japanese bonds and probably stocks would crater, one or more major currencies would implode. No way to know which event would come first and in what order the other dominoes would fall, but without doubt something had to give.

And gold, of course, had had its correction and was, at the beginning of 2014, perilously close to the mining industry’s cost of production. The last time that happened, in 2008, an epic bull market ensued — and gold-bugs were anxious for a replay.

Yet 2014 turned out to be a pretty good year for the powers that be and the economic theories that animate their behavior. Equities boomed, interest rates fell, the dollar soared, and gold ended the year below where it started. Gold miners, after a year of operating at an aggregate loss, have seen their market values crater.

2014 should not have happened, but it did. There’s no way to sugarcoat it: the gold bugs were wrong, Austrian economics was wrong, and the Keynesians were right. And now the sound money community is left trying to figure out what it missed and, crucially, whether the problem was merely one of timing or of fundamental worldview. With that in mind, a few explanations for the debacle that was 2014:

• Inflating away the world’s reserve currency is a whole different animal. When a single not-very-important country decides to devalue its currency, it simply prints a lot of new pesos or whatever, and the exchange rate falls until a crisis ensues. That is not, however, how it works for the US because so much of the world’s debt is linked to or denominated in dollars. Consider:

When you borrow money, you’re in effect betting against, or shorting that currency because you benefit if it goes down in value. But at the same time you’re creating future demand for it because in order to pay off the loan you have to acquire more of that currency. So the fact that so much of the world’s debt is denominated in dollars means that demand for dollars is rising even as US debt increases. In the short run, this makes the dollar stronger despite America’s deteriorating balance sheet. Add in the fact that the rest of the world is in even worse shape than we are, which makes the US look like a safe haven in relative terms, and the result is a strong dollar even in the face of soaring US liabilities.

• A fiat currency printing press is an amazingly powerful tool for fooling people. The world’s governments have been able to use trillions of dollars of newly-created, largely-fictitious currency to force down interest rates across the yield curve and push up equity prices. This signals to market participants that 1) things are basically okay, so relax, 2) it’s actually prudent to go for growth and yield by buying equities, junk bonds and houses, 3) it’s reasonable to borrow for things like college and cars because there will always be plenty of money, one way or another, to cover those debts, and 4) betting against the status quo will be punished. Short sellers and savers will lose because equities will be secretly supported, competing forms of money like precious metals will be depressed, and cash will yield next to nothing.

• A global currency war allows the combatants to shift back and forth between easy and tight money for a really long time before anything serious happens. Between 2008 and 2013, the US and China were on the offensive, borrowing huge amounts of money and/or inflating central bank balance sheets. As a result, their currencies were relatively weak and they grew while Europe and Japan stagnated. Now it’s the turn of the latter two to inflate while the former try to stabilize their debt loads. Aggregate global debt continues to soar, making the eventual financial crisis that much more catastrophic. But in the meantime the game of musical chairs can go on longer than it might for any individual country inflating alone.

• Debt is deflationary. The world is more heavily laden with bad paper than ever before. And while central banks’ efforts to inflate this debt away is inflationary, the paper itself wants to implode, which is highly deflationary. These two forces have been contending for over a decade, with the advantage shifting back and forth. In 2008 deflation was ascendant, but by 2011 it looked like inflation had the upper hand. Now we’re heading back into a deflationary stretch as the past few years’ tight money in Europe and Japan push those two into recession and send global capital pouring into the supposed safe haven of US bonds and stocks.

So, back to the big question: Does the above refute the sound-money/gold-bug case, or simply delay it?

Almost certainly the latter. Rising dollar-denominated debt leading to a stronger dollar is not a perpetual motion machine. All it does is allow the US and the rest of the world to take on even more debilitating levels of debt than would otherwise be possible.

China, India, Russia and Brazil, meanwhile, are actively bypassing the dollar in favor of trading in their own currencies, while accumulating pretty much all the gold being produced by the world’s mines. So the longer the current situation continues, the bigger the disruption when the dollar becomes just one of many global trading currencies.

Meanwhile, artificially depressing bond yields and supporting stock prices can only go so far before valuations (already crazy) become impossible to support with any amount of fiat currency. The yield on some Japanese bonds recently dropped below zero, and US 10-year treasuries are around 2%. US equity prices, margin debt, corporate share repurchases and most other measures of overvaluation are all in record territory. Unless we’re moving to a world of negative interest rates (which is a whole different theoretical discussion) and dot-com era P/E ratios, the end for these trends is near.

So this has to and therefore will blow up. And when it does, the world’s central banks will respond with debt monetization on a scale that will dwarf QE3 and Abenomics. “Inflate or die” will become official global policy. And gold will behave as it always does in such situations, by going parabolic.

But when? What seemed imminent a year ago now feels a little further out, as oil keeps falling (down another 2.5% as this is written on Dec 29), the dollar keeps rising and everything else is flat to down. Maybe instead of focusing on the numbers, which clearly don’t mean as much as they would in a world of actual functioning markets, we should think in terms of philosophy and psychology. Here’s a snippet from James Howard Kunstler that gets at the spirit of things without predicting “when things stop working”.

One reason this is happening to us is that we allowed reality to be divorced from truth. Karl Rove wasn’t kidding back in the Bush-2 days when he quipped that “we create our own reality.” The part old Karl left out is that there’s a price for doing that. In the short run, it allows you to pretend that you have superpowers and can act in defiance of the way things really are. In the longer run, your view of the world comports so poorly with the facts of the world that things stop working.

By John Rubino

dollarcollapse.com

Copyright 2014 © John Rubino - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules