Has gold become unrooted from reality?

[Finster]

Re: Has gold become unrooted from reality?

Good question. All this stuff we read all day about how "high energy prices are causing inflation" exhibits the most profound lack of understanding of how money works.

1) Since the global economy became dependent on oil, oil = money. Since then, all currencies have become proxies for oil, but especially dollars.
2) Oil can't rise in terms of itself, only in terms of proxy currencies (dollars) used as the primary means of exchange (see Energy and Money).
3) If the oil price rises in dollars, that is either because more dollars are being printed to pay for the oil for a given level of demand OR oil demand is rising while dollar creation is being held relatively constant.
4) If Iran succeeds–at long last–at goading the US into war, or loses patience and attacks on some pretext, and the oil price does not rise, that may be because the markets expect a) oil demand to decline, b) dollar money supply to decline, c) both, d) lags in any of a, b, or c.
5) The gold price now reflects global perception of future financial/currency risk not inflation (see charts below).

FWIW, I agree with all of the above, except hasten to point out re Item 3) that the oil price and the dollar production do not have to be contemporaneous. Much of the increase in the price of oil over the past three or four years is a lagged effect of dollar printing over the past ten or fifteen. The oil price has been playing catch up. At the risk of oversimplification, China has served as sort of a reservoir for those excess dollars, collecting them while amassing large dollar reserves and using much of them to buy US securities. As this reservoir mechansim becomes increasingly saturated, however, it begins to overflow. China has to start buying something real to use as inputs for its manufactured goods and to buck up its own infrastructure. So the latent effect of past inflation adds to the effect of current inflation, resulting in an increase in the oil price larger than either one alone. Economists tend to chalk up the latent portion to "demand", but its etiology is inflation just the same.

Re Item 5), similar considerations apply. Inflation is a decline in the market value of currency relative to real stuff, while currency devaluation is a decline relative to other currencies. Two facets of the same phenomenon. The risk to the dollar in forex markets is largely due to the pent-up effects of dollar overproduction as the exporting nations have tried to prop up the dollar to support their export markets. If eventually the dollar crashes in the forex markets, it will be due not merely to dollar printing immediately preceding the crash, but to the cumulative effects of many years of dollar printing, perhaps along with the markets' perception that it will continue or accelerate. To the extent that other currencies are being inflated along with the dollar - as has been the case for much of the past few years - gold ends up being the currency of last resort, and its price action may reflect not only the rate of paper currency decline but a real increase in value as well, again due at least in part to playing catch-up with inflation already under the bridge.

[jk]

Re: Has gold become unrooted from reality?

If Iran succeeds–at long last–at goading the US into war, or loses patience and attacks on some pretext.....

ej, why do you think iran wants war? i think they are happy having a proxy war in iraq. between iraq and the israeli-hezbollah war, iran is emerging the big winner from all recent conflict in the middle east. they are swiftly becoming the major regional power, striking terror into the heart of the saudis and other u.s. clients. they are winning all they want right now, playing geopolitical chess. to provoke direct conflict with the u.s. right now looks like a foolish strategy, with little to gain beyond what is already in their reach, if not their grasp.

[EJ]

Re: Has gold become unrooted from reality?

Still, if it was war with iran that was freaking people out, you'd think oil would spike as well...

Good question. All this stuff we read all day about how "high energy prices are causing inflation" exhibits the most profound lack of understanding of how money works.

1) Since the global economy became dependent on oil, oil = money. Since then, all currencies have become proxies for oil, but especially dollars.
2) Oil can't rise in terms of itself, only in terms of proxy currencies (dollars) used as the primary means of exchange (see Energy and Money).
3) If the oil price rises in dollars, that is either because more dollars are being printed to pay for the oil for a given level of demand OR oil demand is rising while dollar creation is being held relatively constant.
4) If Iran succeeds–at long last–at goading the US into war, or loses patience and attacks on some pretext, and the oil price does not rise, that may be because the markets expect a) oil demand to decline, b) dollar money supply to decline, c) both, d) lags in any of a, b, or c.
5) The gold price now reflects global perception of future financial/currency risk not inflation (see charts below).

Gold - Euros


Gold - US$

[blazespinnaker]

Re: Has gold become unrooted from reality?

Still, if it was war with iran that was freaking people out, you'd think oil would spike as well...

[blazespinnaker]

Re: Has gold become unrooted from reality?

I'll quote this cause I really liked it:

"The strongest reason to own gold right now is the fact that we have three U.S. aircraft carriers with task forces parked opposite Iranian shores," said Ralph Preston III, an account executive at San Diego-based Heritage West Financial Inc.

"This is an unusually high concentration of military build up on the part of the United States in the Persian Gulf," he said.

AntiSpin: So you're not caught by the surprise jump in gold prices, The Jerusalem Post reports today, "The successful launch of three new models of sea missiles is the Gulf should send a strong message to the US to cease military maneuvers in the region, an Iranian navy chief said Friday." more...
"

[jk]

Re: Has gold become unrooted from reality?

Any thoughts on what's going on here? Hidden geopolitical risk or is someone massively accumulating gold?

nothing's very hidden. obvious geopolitical risks and obvious economic risks. gold has for several years been in the process of becoming re-monetized. that process is continuing. and i don't think it's someone massively accumulating gold, i think it's some-many. gordon brown marked the low with sales from the uk's hoard, but i would guess other cb's may be accumulating [in the spirit of "diversification" of reserves] along with asian and middle eastern interests and many discerning individuals such as those you find around here.

[blazespinnaker]

Re: Has gold become unrooted from reality?

oh ok I get it, we're going to war with Iran.

I wonder if this will happen before next tuesday?

[blazespinnaker]

It has, it seems, become decoupled from oil.

Huge drop in treasuries today - gold plummeted briefly, but shot straight back up.

Any thoughts on what's going on here? Hidden geopolitical risk or is someone massively accumulating gold?