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Thursday, February 21, 2013
John Ward – Analysis : The Fall And Rise Of Gold, The Rise And Fall Of Property. Time To Be A Contrarian
GOLD & PROPERTY: contemporary weirdos explained
In the opening post today, I postulated that ‘indeflation’ involves a situation where taxes and prices go up, and the value of assets goes down. Following that original Slogpost from 2010, I returned to the subject several times, the last time before the Bilderberger Conference of last year, when I predicted:
‘As more sovereigns and banks collapse under the weight of their debts, notional funny-money obligations will start to seep into the real system, and nations the world over will print fiat currency in order to turn the abstract into the concrete…or put another way, silly bankers’ games into a millstone. That will depress asset values, and inflate currencies.’
A year on, that outlook is a way from reality as yet, but there are solid reasons for that: I simply cannot seem to get it through my head that those in charge are all sociopathic hoodlums who will do anything to keep the plates in the air. Looking at ‘funny-money obligations will start to seep into the real system‘ for instance, I once again underestimated the capacity of central bankers to slow down that process. As my valued source in New Mexico rightly avers, “This excerpt echoes a reasonable possibility for what is going on behind the scenes of the much ballyhooed “currency war”. The central banks have agreed to plug whatever hole is draining the system via debt deflation in the shadow bank and OTC derivatives sphere. The BIS acts to coordinate.”
Nevertheless, along the way there has been some heavy-hitter support for my theory. In Q4 of the influential Hoisington Report, Van Hoisington and Lacy Hunt note as follows (my emphases):
‘To be sure, prices of many items are
rising, partially due to legislative changes in
taxes, fees, regulation, compliance costs, medical
mandates and other non-market forces. However,
competition in the marketplace has created
downward pressure on market driven prices. Thus,
we have an unusual paradox whereby legislative
and regulatory changes elevate the cost of living,
yet with this inflation, there is no associated growth
in income and standards of living decline. In this
circumstance, real income falters, and purchases of
non-mandated and discretionary items decline in
value and price. Call it “the deflationary paradox
of legislated increases in the cost of living.”’
This is pretty much word for word ‘indeflation’ as I first described and predicted it four years ago. I also wrote at length that, like it or not, the falling world demand for manufactured goods was bound to produce the all-time demand slump. This time we are well on the way to that, and early up, Hoisington and Hunt nail the point firmly: ‘The global economic environment is best characterized by an insufficiency of aggregate demand. That is, the capacity to produce goods far exceeds the final demand for those products.’ You may observe that this is a blinding glimpse of the obvious, but on the other hand everyone from George Osborne via David Cameron and Ben Bernanke to even Jim O’Neill has been in apparent denial about it – and remains so.
I think the asset decline is about to hit big-time this year, but at the moment that looks wrong. That is, I remain certain that property and durable prices will fall, but gold will be the exception because (a) it is still a safe haven in the end and (b) it is no longer an asset: it is increasing turning into a currency guarantee. However, right now the opposite seems to be happening.
UK and US house prices aren’t rallying, but they aren’t plummeting either:
and yet the asset gold is now quite clearly challenging the lower reaches of its recent historical price. While this doesn’t make sense in terms of ‘fundamentals’, the name of the élite game in 2013 is hammering the fundamentals against the wall to ensure they can’t escape.
A top-end ‘glitz bricks’ bonanza has produced boom-time in upmarket parts of the world’s most secure places, because the mega-rich rightly saw that it was the only haven left not being manipulated: a piece of pre-Armageddon insurance against loss of wealth, not the search for somewhere to live. And one UK Government scheme has unlocked a little more mortgage credit than would’ve been available via the shredded balance sheets of the banks. But everything is now in place for a massive price correction in the mainstream sectors of the Western property markets: lack of buyer confidence, falling disposable incomes, nervous lenders, a worsening economic situation, and falling full-time employment make it a certainty.
So what’s the story on gold? I don’t think anyone could today accurately audit the relative value of all the factors involved in the shiny metal’s short-term decline. But some of them are obviously influential. One is manipulation of the price downwards, in order to render this soon-to-be central bank asset/currency hybrid more affordable for those allegedly in charge. Another is the markets effectively helping in this process – by sticking to fundamentals as the basis for analysis, and thus scaring off investors in gold.
The International Business Times, along with most other main sites, observed yesterday that ‘The big news out of the gold pits Wednesday is that futures violated the psychologically important $1,600 an ounce level. At this writing, Comex-traded gold is trading just under $1,568 per ounce. Arguably, the bigger news is the technical condition gold’s slide has caused….’. This refers to the most repeated phrase of the last 48 hours: that gold is passing its technical ‘death cross’ – suggesting a long-term bear market in the metal.My own feeling remains that a bear-market couldn’t be maintained while trading gold remained legal.
Finally, there is a more commonsense view (which I partly share) from Jim Steel, chief commodities analyst at HSBC:”What’s really behind this is we’ve had three major risks that supported the gold market last year, which was the fiscal cliff, the possibility of Greece leaving the euro and the euro zone crisis, and the third was a hard landing in China..and all of those risks have mitigated this year, and I think that has undercut the bullion market.”
I think he’s right about the cause, but totally wrong about the risk diagnosis: all of the risks are still in place, and ready to blow up in every face once the subdued fundamentals start to assert themselves. It’s no longer if, but when: and when they do, the price of gold must sky-rocket. For more on why I think all that, stay tuned for this afternoon’s final analysis of indeflation: a term whose time has come. Allegedly.