— Yesterday we asked whether inflation or deflation would result from Japan hauling their capital back home. Of course we don’t really know the answer, but we’ll have a crack at guessing some scenarios in a moment.
— We also wondered about gold. Doesn’t gold normally spike in times of turmoil? And if gold is money, shouldn’t the preference for greater liquidity (which is the same as saying a greater preference for money) have driven up the gold price too?
— Well, yes. But it didn’t. The ‘why’ is the interesting part.
— If you’re a Japanese investor, your yen denominated gold holdings just took a punch to the guts. You can see that quite clearly in the chart below, courtesy of Bullionvault.
— Obviously this is a reflection of the surge in yen against all currencies, including gold. In fact, this price action is a good time to remember gold doesn’t move in price at all. It is the paper currency it is measured against that moves.
— Even though the US dollar was getting torched against the yen at the height of the liquidation selling, it actually rallied strongly against gold (i.e. the price of gold fell heavily in US dollar terms).
— So let’s get this straight. As the US dollar fell heavily against the yen, it was rallying in gold terms? Hmmm…
— Check out the chart below, from Kitco. It shows the 24-hr spot price of US dollar gold as it’s traded around the world. Take a close look at the blue line, which represents gold trading on 15 March – the big risk asset sell-off day around the world.
— Funnily enough though, the sell-off didn’t take place during Asian trading. If you look to the left of the chart, you’ll notice that the gold price was actually rising as the Nikkei was taking a bath.
— Only during London trading, and as New York opened, did gold start to suffer heavy selling. Now you could argue that London is the largest market for gold trading and any major selling takes place there. But surely you would’ve expected to see weakness in gold during Asian trading too?
— More than likely, central bankers and their bullion bank agents didn’t want to see a gold spike (or even gold strength) while the yen was showing the US dollar who is boss. When the US public sees gold fall by double digits, it reaffirms their faith in the good-old greenback. ‘Why would you buy gold in times of crisis when you can own the US dollar?’
— If you think the gold price is not ‘managed’ by central banks then you’re really not looking hard enough. The management scheme has certainly become very sophisticated via the use of massive amounts of derivatives, which is essentially paper gold.
— If you couldn’t be bothered trying to work out what’s really going on (and let’s face it, not many have the time or inclination) just google the London Gold Pool.
— That was a gold-management scheme out in the open for all to see. The aim was to maintain the farce of Bretton Woods, which was meant to peg the US dollar to gold at US$35 an ounce, while the world’s other major currencies were fixed against the US dollar.
— From Wikipedia: ‘The London Gold Pool was the pooling of gold reserves by a group of eight central banks in the United States and seven European countries that agreed on 1 November 1961 to cooperate in maintaining the Bretton Woods System of fixed-rate convertible currencies and defending a gold price of US$35 per troy ounce by interventions in the London gold market.
The central banks coordinated concerted methods of gold sales to balance spikes in the market price of gold as determined by the London morning gold fixing while buying gold on price weaknesses.
The United States provided 50% of the required gold supply for sale. The price controls were successful for six years when the system became no longer workable because the world’s supply of gold was insufficient, runs on gold, the British pound, and the US dollar occurred, and France decided to withdraw from the pool. The pool collapsed in March 1968.’
— The gold pool collapsed because the governments had (as all governments have) an incurable preference for easy money. There was a run on gold because too much paper was created to purchase it.
— The French have a saying that translates as ‘the more things change the more they stay the same’. That certainly applies to the gold market. Gold is managed now in the same way it has been for decades.
— Gold is the only warning siren for the international monetary system. Forget the nonsense written about it going up because of ‘concerns about inflation’. In a fiat currency world, there will always be inflation. When the system that produces the inflation starts to wobble and break down, as it is now, gold will let you know.
— But the mis-managers of the monetary system would prefer you didn’t know how badly they were doing. They manage gold’s ascent so it won’t lead to too many questions.
— At some point though, they will lose control as they did back in the late 1960s. Back then, within a decade the US dollar went from buying 1/35th of an ounce of gold to just 1/850th of an ounce. It took a central banker with good-old G&D (guts and determination) to raise REAL interest rates to a point that effectively saved the financial system.
— We don’t know about you, dear reader, but as much as we crane our necks, we can’t see a central banker on the horizon, and certainly not in the foreground, with anything resembling the G&D necessary to repair the system. They’re too busy handing out free lunches.
— We’ve run out of time to do the inflation/deflation thing. We’ll save it for another day. It’s not a simple discussion. You need to define the argument. Back in the 1970s, we had very high price inflation and asset prices that largely went nowhere. Throughout the 1990s and 2000s, we’ve had relatively benign or low price inflation combined with massive asset price inflation.
— Could we be in for a bout of high price inflation and asset price deflation?
Until next time…
For Markets and Money Australia