Central bankers want us to believe
that monetary policy is about banks, interest rates, and the ability to get a
"cheap" loan. The 2002 quote below from Ben Bernanke points to the
primary goals of printing money - to boost asset prices and "scare'
people into consuming and investing before prices go up.
Like gold, U.S.
dollars have value only to the extent that they are strictly limited in
supply. But the U.S. government has a technology, called a printing press
(or, today, its electronic equivalent), that allows it to produce as many
U.S. dollars as it wishes at essentially no cost. By increasing the number of
U.S. dollars in circulation, or even by credibly threatening to do so, the
U.S. government can also reduce the value of a dollar in terms of goods and
services, which is equivalent to raising the prices in dollars of those goods
and services. We conclude that, under a paper-money system, a determined
government can always generate higher spending and hence positive inflation.
If you question the goal of boosting
asset prices, watch this 2010 video,
which explains how quantitative easing works in the real world. As seen via
the price of gold, the markets have been questioning that "a determined
government can always generate higher spending and hence positive
When you update market models
every day, you notice subtle shifts in investors' perceptions relative to
risk and inflation. While it looks flat in the chart below, the slope of
gold's 200-day moving average ticked down on Wednesday.
The 200-day moving average (MA) is
commonly used by traders to monitor long-term trends. Gold is now below its
200-day MA and the slope is trying to roll over; both lean bearish for gold.
Since the 200-day monitors long-term trends, the analysis here is related to
the longer-term outlook.
Gold is commonly used by investors as
a hedge against inflation. Inflation can surface after a significant round(s)
of money printing from central banks, like the Fed and European Central Bank
(ECB). The central bankers are fighting deflationary forces related to the
purging of debt, which can occur via writedowns or
defaults. Greece recently wrote down their debt, meaning they told
bondholders you will get less back than we originally promised when your bond
matures. A writedown is deflationary since it
destroys wealth and reduces the amount of money in the financial system.
Gold is an excellent way to monitor
investors' perception of how the battle between inflationary forces (money
printing) and deflationary forces (purging debt) is playing out. In the chart
below, investors were betting on the central bankers and inflation. The black
line is the price of gold. The thin colored lines are moving averages, which
are used to filter out the noise of day to day volatility. The chart below
shows a strong trend and bias toward future inflation.
When Europe's enormous debt problems
became the market's primary focus in mid-2011, investors began to realize how
big, and how deflationary, the problem was. The right side of the chart below
looks quite different than the left side. Notice on the left side, price
never came back to the 200-day, nor did the "faster" moving
averages ever cross the 200-day. The right side of the chart looks different
and breaks the pattern of inflationary fears.
The chart below shows the last two
times that (a) the price of gold broke below the 200-day MA and (b) some of
the "faster" moving averages crossed below the 200-day. In Case A,
the slope of gold's 200-day (pink) never rolled over in a negative manner. In
Case A, stocks performed well after gold's bout of weakness (see bottom of
chart in late 2006). In Case B, the slope of gold's 200-day did roll over in
a bearish and deflationary manner. Stocks did not fare well (see red arrow
lower right). As a reminder, gold's 200-day is trying to roll over in the present
day, which looks more like Case B.
How can all this help us today? As
long as the chart of gold remains in its current state (bearish
200-day/bearish moving average crossovers), we should manage all risk assets
with care (from an intermediate-term perspective). If the slope of gold's
200-day regains a positive bias and buyers flock back to the yellow metal, it
would send bullish signals for risk/inflation protection assets, including
stocks. Looking at things from a bullish perspective, the daily chart of the
gold miners ETF (GDX) completed a "bullish engulfing" candlestick
pattern on May 9, which can be an early sign of a reversal in price.
If you question the gravity of the
problem of too much debt, (a) ask yourself why the economy has remained so
weak when interest rates have basically been at zero, and (b) watch this
October 2011 video
explaining the European debt crisis.