Jump to content
House Price Crash Forum
Sign in to follow this  
Leeds-Bozz

Bernanke & Gold

Recommended Posts

Browsing the monthly reports from Ruffer I found this interesting bit on gold:

Owning gold is rather like gap year bus travel in Guatemala: it’s uncomfortable,

extremely nerve racking and you are surrounded by strange looking

bugs. It also happens to be the only way of reaching your destination when

money itself is a problem.

With fifteen percent of the fund in gold equities we are firmly wedged in

against the cockroaches and chickens, trying not to look over the edge as the

gold price veers wildly on its route to new highs. Many people see only the

risks involved in such journeys, which is understandable given the burnt-out

wrecks that lie strewn across the valley floor. In doing so, they ignore the

sometimes greater dangers of staying put.

Gold is a schizophrenic asset. For much of the time it is seen as a form of

money, arbitrating against other fiat currencies, in particular the dollar, as a

store of value. Then, occasionally, it acts like any other commodity whose

price is determined by underlying demand and supply dynamics. Sales by

central banks, which have huge reserve holdings of gold (estimated at 35,000

tonnes), are often perceived to be the swing factor in determining which

‘mood’ predominates.

The recent excitement in the yellow metal has been sparked by its price

appreciation as measured in currencies other than the dollar. In fact, the gold

price has made 18 year highs in US dollars while the dollar has been strong

against other major currencies. If we accept global bond markets’ assessment

that inflationary risks are limited (admittedly debatable), then the price action

suggests something new is going on in the gold market. To better understand

it, we should look through the prism of gold as a commodity.

Central bank sales for this year, agreed under the Washington Accord, were

completed some time ago and underlying mine supply is being squeezed by

other factors. First, the strength of the South African rand over the last

three years rendered much of the country’s production unprofitable. Its

production has fallen over 23% since 2000 and now represents only 14% of global

production. Secondly, the global commodity boom has created enormous inflation

in input costs such as steel, cement, and even tyres. Costs are blind as to whether

the hole in the ground produces copper, tungsten, or gold, so the cost curve for

the whole mining industry has been raised. With the latest World Gold Council

figures indicating a supply deficit and global demand up 18% this year, higher prices

simply reflect basic tenets of economic theory.

‘The second leg of the gold bull market’, as it is being billed, is exciting stuff for

gold bugs and technical analysts alike. We are a little more contained in our enthusiasm.

For us, gold’s true moment of glory will come if, or more likely, when

US financial authorities are forced to follow through on the November 2002

speech made by Ben Bernanke, the likely successor to US Federal Chairman Alan

Greenspan. In it he assured financial markets of the Fed’s ability to monetise away

the threat of deflation thereby debasing the dollar. Anyone not on the bus at that

moment will struggle to preserve their capital.

Until then, gold’s journey will continue to be wild and rugged. Optimising our

comfort will require careful navigation and plenty of bug spray.

I had only vaguely heard of Bernanke but found the text of his (long) speech here:

http://www.federalreserve.gov/boarddocs/sp...121/default.htm

Interesting reading....comments from those more knowledgeable than myself?

Edited by Leeds-Bozz

Share this post


Link to post
Share on other sites

I'm just reading his speech.

Perhaps this thread should be moved to "investments"...

Anyway - a question - for the financial experts on this site... According to the above referrenced speech, an argument for Gold exists regardless of whether the economy enters an inflationary or deflationary period, as the fix for the latter is to artifically stimulate the former.

During the last 12 years of deflation in Japan, the price of Gold dipped and recovered... showing perhaps limited manipulation of the economy...

Why didn't central bankers in Japan flood yen into the system ("printing money") to stimulate inflation and prevent this 12-year phenomenon? Surely this would have also had the effect of making their exports cheaper, thereby stimulation the economy further???

I think the main reason I'm asking this is to further guess what happens to Gold during a deflationary period, using Japan as the model. I'd like to know how much manipulation of the economy has been in place over the last 12 years, and whether Gold price movement over that period can be attributed to any one strategy. I suppose ultimately I'm keen to know whether there's a flaw in the "hold gold" opinion expressed so often on this board...

AF.

Share this post


Link to post
Share on other sites

I'm just reading his speech.

Perhaps this thread should be moved to "investments"...

Anyway - a question - for the financial experts on this site... According to the above referrenced speech, an argument for Gold exists regardless of whether the economy enters an inflationary or deflationary period, as the fix for the latter is to artifically stimulate the former.

During the last 12 years of deflation in Japan, the price of Gold dipped and recovered... showing perhaps limited manipulation of the economy...

Why didn't central bankers in Japan flood yen into the system ("printing money") to stimulate inflation and prevent this 12-year phenomenon? Surely this would have also had the effect of making their exports cheaper, thereby stimulation the economy further???

I think the main reason I'm asking this is to further guess what happens to Gold during a deflationary period, using Japan as the model. I'd like to know how much manipulation of the economy has been in place over the last 12 years, and whether Gold price movement over that period can be attributed to any one strategy. I suppose ultimately I'm keen to know whether there's a flaw in the "hold gold" opinion expressed so often on this board...

AF.

they did!!!!!!....but the whole world was going through a deflationary phase too!....why do you think US/UK had been cutting IR's so much?

global growth was knackered,and so domestic spending came to the rescue in US/UK.japan just couldn't compete given the ramp-up it had in the 80's.....when speculators pulled the plug all the tiger economies suffered...but japan being the biggest and best known fell hardest.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



×
×
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.