by Michael J. Kosares
We all know that the major central banks around the world are on the same
page when it comes to inflation: They want it higher. One member
of the European Central Bank’s executive board, Yves Mensch, went so far as
to suggest that Europe’s central bank might buy gold in an effort to ratchet
up the inflation rate.
Today OPEC decided to take no action to stem the glut of oil depressing
the price in global markets. The oil price is the chief driver
of price inflation, thus with OPEC showing little interest in propping up the
price, deflation starts to dominate market thinking. Thus the drop in
various currencies – a miserable day for the British pound (the BoE is trying
desperately to create inflation in the UK) – and the drop in gold.
CNBC ran a headline asking Could the oil collapse cause the next credit
crisis? “It’s not just the Saudis who could get much poorer from the oil
price free fall,” says CNBC. “Everyone could suffer if the collapse
triggers a wave of defaults through the high-yield debt market, and in turn,
hits stocks. The first to fall: the banks that were last hit by the
housing crisis. Why could that happen? Well, energy companies make up
anywhere from 15 to 20 percent of all U.S. junk debt, according to various
sources.”
Gold is always the canary in the coal mine when it comes to these sudden
shocks in the financial marketplace. It’s reaction is quick and
visceral, but the first market reaction is not always the real reaction.
That will come later. Those who are driving gold down today on
the commodities exchanges forget that gold’s rise over the last several years
(despite its interim downside correction) has been in response to disinflation,
not inflation — and demand remains strong due to concerns about the
stability of the financial system itself. Gold rose like a phoenix from
the ashes of the last financial crisis because it is a store of value and a
portfolio insurance policy, not because prices were about to bolt higher.
The gold-as-an-inflation-hedge (and inflation hedge only) bias is group
think minus the advantage of objective analysis and the correct reading of
recent history.
If the latest oil shock – this time in a southerly direction – creates
knock on effects, we will hear a great deal about systemic risks in the days
and weeks ahead. Recall that gold at first went south in the crisis of
2007-2008 and then headed sharply higher as investors moved to shore up their
portfolio’s against the possibility of a showdown on Wall Street and within
the banking system.
We are in a much different situation today than we were back then and the
system as a whole still suffers from the damage done by the last
crisis. If a crisis were to hit today, it would start with a much
weaker line-up on the playing field than the last time around. Keep in
mind too that all of this has occurred because quantitative easing on a
global basis simply has not worked.
We suspect that gold and silver demand will grow stronger even if the
price weakens, or perhaps because the price weakens. Those who
understand the virtues of gold ownership are not going to suddenly go to
their national currencies, or the banking system, or the New York Stock
Exchange as a defense. They will go to gold and silver.
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