In the current global manic rush by central banks to inflate and by governments to spend that paper, there are a few observers who have expressed concern that at some future date this wholesale, last ditch Keynesian and Statist approach just might actually produce "inflation."
Many Wall St. types argue "No, inflation is not the problem and is not likely to be the problem for some time. And besides, gold is quiet, not signaling any concern about inflation." Though they like to espouse free market generalities from time to time, these same Wall St. types actually want the State(s) to intervene to protect this or that asset class – to which they are personally attached and now sinking with. While investors are down in most asset categories by 40% in 2008, the orthodox investor and his portfolio manager can’t weather another 20% drop this year! "Oh sure, Keynes was full of it, but good grief we can’t stop this stimulus because it just might work. It must work!" All intellect out the window, it’s desperation time, wish-fulfillment time on Wall St! And how short their memories – failure to remember the policies of the Fed, from August, 2007 onward when the Fed – armed to the teeth with "surprise" interventions – sought time-after-time to halt the ratcheting decline in equity and real estate prices. Was that a success? Or did those penny-in the-fusebox actions merely delay and therefore intensify the decline to the point where a market correction morphed into a collapse? So, let’s do it some more and find out yet again! We can then worry about an "exit strategy" later, we are told.
So, with that as a backdrop, what has been going on with the various "asset classes" in recent years? And especially, what if anything does gold tell us about the risk of inflation? Is it really the quiet unconcerned metal that these State apologist economists claim? Historically gold is a wise metal that often anticipates inflationary and deflationary trends; defining inflation in the Austrian School manner – as growth in the money supply (s), which we now must think of globally, not merely as a U.S. monetary and fiscal event.
With a few comments, I provide some stunning charts that speak volumes about the actual underlying trends, asset value shifts, safety of capital, etc., all of which are reflective of macro-investment decisions that are being made, net-on-balance, by millions of global investors. And they speak volumes!
I begin with a chart that deals with the question: How have commodities done as an alternative or "balancing" asset class over the past years? In this case I measure the CRB Index’s monthly closes v. the monthly closes of the Dow Jones World Index (data begins for this equity index only in 1994, therefore the comparative chart begins then). Well, the answer is pretty clear.
Depending upon when bought into commodities as an alternative asset class (which might balance your equity holdings), you either won or lost several times over that 15 years. In fact an astute trader did well to time some swings in that relationship. But the long-term answer is that commodities were really no better and no worse than global equities over the past 15 years, and presently commodities are actually sinking at a faster pace than equities. So commodities seem to be unconcerned about "inflation" at least as mainstream economists are prone to define inflation.
The same period of time (1994 to present) gold in relation to global equities. Obviously something happened to gold relative to global stocks, something that changed its trend tone with drama in late 2008. The value (price) of gold in relation to that basket of assets exploded in a quantum manner, unlike the opposite behavior of the commodity asset class. Might I point out that the timing of this massive valuational change in gold relative to stocks was coincident with the panic by governments to reflate the collapsing bubble that a combination of their policies has created a handful of years before.
I have watched gold’s behavior v. other commodities for 35 years, and back in the hyper-inflationary times of the late 1970s’ up to 1980, gold soared, but so did the price of grains, meats, fertilizer, etc. Gold was not singularly special. It was part of a general commodity bubble. This time, beginning sharply in late 2008, Gold has made a massive statement and done it in what most mainstream economists continue to define as a non-inflationary/deflationary market environment. Gold says to those economists – define your concepts more accurately fellows. There is massive inflation (monetary expansion accompanied by State power expansion) and it is underway at full throttle. Beneficiary this time is gold (and silver) – almost exclusively. This explosion in relative valuation of gold is more historic and dramatic than any I have heretofore seen. Would not even surprise to see the net price of gold (v. dollar) engage in something comparable – as investors channel their bets onto the back of the lone horse that is still standing and reliable. Though that net price consequence is actually not a necessary event, because gold already has accomplished its role as a State-proof investment asset.
Finally, the chart below shows gold’s behavior v. the broad commodity asset class. For 30 years it moved in a range v. other commodities, no better, no worse. That sedate range of valuation fluctuation is now over, done with. Gold has made a statement – if your eyes are wide open. Gold sees inflation NOW, and has already begun to respond in an historic manner.
September 5, 2009
J. Michael Oliver [send him mail] has provided proprietary technical analysis and consulting for the past 20 years to large asset management institutions. He is also a hedge fund manager.Copyright © 2009 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.