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Storing
value, rather than trying to grow it, is taking the lead once again..
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GOLD GOES UP when cash and
bonds fail to beat inflation. True in the Seventies, and true again in the
last decade.
Both times, gold also
beat both stocks and industrial commodities as well. Perhaps because storing
value, rather than trying to grow it, takes precedence when the cost of
living eats into your capital.
But now, from here?
"Markets don't
expect inflation; professional forecasters don't expect inflation, and
economists who know how to do their job don't expect inflation," claims
academic economist Brad DeLong on his blog.
Nevermind that inflation-linked 5-year Treasury bonds do see inflation ahead, or that the global gold market clearly fears it. Never mind that
conventional Treasury bonds didn't wake up to the 1970s' inflation until 1980, and nevermind today's
"fail" for professional forecasters on May's US jobs data.
(But hey, they were sold a pup by March and April's false readings). And nevermind that economists-who-know-how-to-do-their-job
are all too often now in a different job, trying to run the economy rather
than observe it, and opting everywhere to devalue money at the fastest pace
– accounting for post-inflation interest rates – in well over
three decades.
No, "Whichever inflation
measure you prefer, there's no reason to tighten," as DeLong's fellow economist Paul Krugman
puts it, blogging at the New York Times.
So what if inflation goes negative
– making real interest rates positive, even if the official rate is
slashed even to zero? Outside early-2000s Japan and the global wipe-out of
spring 2009, modern history offers no examples. Both times, expert economists
urged policy-makers to cut nominal interest rates
below zero somehow, either by
printing money to excess or taxing bank deposits or generally destroying
cash, so that real rates could also stay negative.
Both times, gold rose in nominal
and real terms as well. What gives...?
Here in May 2011, there's a
"disparity developing" between industrial and precious metals,
notes the latest Commodities
Market Attributes report from
Standard & Poor's.
Dividing its own
S&P GSCI Industrial Metals Index by the Precious Metals Index, the agency
tracks the relative strength of useful metals against the less industrially
useful (but more socially valuable) metals gold and silver.
"This ratio
generally has been positively correlated with the S&P 500 [US equity
index]," says the report. Which makes sense, because
industrial demand and risk-capital will tend to move in the same direction.
But "the ratio declined again in May," says S&P, down "to
essentially the same level it hit at the end of May 2009.
"What is disconcerting for
many analysts is the fact that the S&P500 has increased 54.23% over the
same two-year period. The implication is that extremely low interest rates
and quantitative easing are likely influencing the level of real assets. At
the same time, the ratio of demand for direct economically-related industrial
assets...is not keeping up with the demand for store of value assets."
More telling still, S&P's Market
Attributes also prints a chart
of the S&P equity index against the ratio of gold-to-silver prices. It
shows (see page 5) how a falling ratio – with gold becoming less
valuable in terms of its industrially useful cousin – usually coincides
with rising stock markets. But the gold-silver ratio has just jumped, up from
a three-decade low near 31 ounces of silver for 1 ounce of gold to 40 and
above.
"Risk-Off and Demand
Destruction," is how S&P's report sums up May 2011. Pointing to the
rising value of gold – against silver, the other industrial
commodities, and common stocks – is simple shorthand, too. Because
storing value, rather than trying to grow it, also takes precedence when the
risk to your capital is that it might vanish altogether as debtors and
businesses go bust amid a true deflation in prices.
That's if deflation gets chance,
of course, before economists and central-bankers get to work destroying your
savings first.
Adrian
Ash
Head
of Research
Bullionvault.com
You
can also Receive
your first gram of Gold free by opening an account with Bullion Vault : Click here.
City
correspondent for The Daily Reckoning in London, Adrian Ash is head of
research at BullionVault.com
– giving you direct access to investment gold, vaulted in Zurich, on $3
spreads and 0.8% dealing fees.
Please
Note: This article is to inform your
thinking, not lead it. Only you can decide the best place for your money, and
any decision you make will put your money at risk. Information or data
included here may have already been overtaken by events – and must be
verified elsewhere – should you choose to act on it.
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