Gold ain’t happening yet

Paulson and Soros still think Gold is a buy, adding to their stakes as the price declines. It’s also not very brave of me to blog about this now as gold has declined when for much of the financial crisis it was increasing in price. I’ve been watching other things.

The idea that the gold price must increase because of massive monetary easing reflects a broken understanding of the economy and a liquidity trap. The money isn’t going anywhere. It is being hoarded in bank vaults. Very few people want to borrow, and aside from banks buying up gold with their excess cash (which would effectively be a massive speculative prop-trading bet on the direction of the gold price) there are few reasons for gold to be spiking massively.

One possibility is the simple safety argument. If you don’t know where else to put your money, put it into gold because it’s gold and it’s safe. Except why should gold be safe? The price swings all over the place like many commodities, but unlike most commodities it has limited industrial uses. Gold arguably has very little intrinsic value.

I’m not saying gold is going to tank. I really don’t know.  I also don’t think anybody else really has a good idea of where the gold price is going to and much of the speculation is by people who think it’s going to rise. Therefore it may have been overbought already (whatever that means when it comes to gold, that is).

Hyperinflation is not here. Gold price increases are not guaranteed. If your entire investment view is centered on monetary policy giving rise to massive inflation, you’re in for a painful ride.

(The one risk that does remain is that when the economy starts turning, and I’m thinking maybe as far away as 5 or 10 years out, if the liquidity isn’t quickly pulled back, we might have high inflation and increases in gold prices. I don’t see this as a major part of the view of current gold bugs. There are too many ifs and too much time and far too much uncertainty.)

Three Years of Mumbling

I can’t believe how the same blog post is basically exactly relevant, word for word, 3 years later.

Eskom produces electricity for the country and makes a profit or a loss doing so. This profit or loss goes back into treasury, which, inefficiencies aside, belongs collectively to the citizens of South Africa.

If prices are too low and Eskom makes a loss, this shortfall must be made up through higher taxes or lower government spending. If Eskom is not given additional capital, it will have to stop buying coal and stop investing in new infrastructure.

Read more about Mumbling in the Dark in 2009

 

If your model has always been wrong

Piet, a reader who comments from time to time on this blog, hasn’t enjoyed what I’ve said about the economy recently. I’ve tried really hard, entirely ineffectively it seems, to answer his points and tease out exactly where his real problems lie.

This post by Paul Krugman talks exactly to “Piet’s views” – the deep-seated emotional views and ideologies that “must” make sense without the careful thought, analysis and model-building required. The same views that have proved almost completely ineffective at predicting anything so far.

Lots of people declared that they “just couldn’t believe” that huge budget deficits wouldn’t drive up interest rates, that “printing” lots of money wouldn’t cause runaway inflation, that slashing government spending wouldn’t have a positive effect on confidence. We know how that has turned out.

Paul doesn’t talk in this post about those who then start changing the facts that don’t agree with their views. “Inflation must be high because the Fed is printing money, but inflation isn’t high, therefore the measure of inflation must be wrong.” – even though multiple independent measures suggest the same level of inflation.