Monday, November 23, 2009


Gold Briefly Breaks $1,170 / oz.

The quote right now is $1169.90, but the headline on CNBC said gold had broken $1,170 / oz.

Incidentally, can the Mishites (followers of Mish) explain why other commodities are doing pretty well too? I.e. my very crude understanding is that Mish is saying something like, "Our economy runs on credit. There is a huge debt overhang that needs to be worked off before you'll see prices rise. The one exception is gold, which is money, and everybody flocks to it in times of crisis. Only with my analysis could you have gotten everything right: falling prices (except gold) and falling interest rates."

OK, and the Murphy hypothesis (in equally crude terms) is: "Yeah we had (price) deflation until December. Since then we've had price inflation. It's true banks create money by advancing new loans, and those loans are way down. However, Bernanke has made sure to offset this force by holding M1 and M2 constant. We haven't seen massive price inflation yet because the banks are sitting on reserves, but we do see the dam beginning to break with the price of commodities, especially gold. Why did this huge wave of deflationary pressure stop on a dime in December 2008? Consumers have been paying down credit cards etc. since then."

I'm not being sarcastic, I would really like to know if Mish somewhere predicted back in late December that oil would more than double in price over the next 11 months. Did he?

Simply put, Mish would argue that the CPI does not include home and other real estate prices. Thus, as Mish would explain, if such prices were included the CPI would be negative.

Frank Shostak has also touched on this concept (though Shostak and Shedlock do not agree entirely). I do believe Mish has quoted Shostak's LvMI articles in his own blog entries.

Lastly, Mish would argue that gold is NOT an inflation hedge. Instead, gold is an asset people flock to during credit stress.

Each of these points has been argued and discussed exhaustively on his blog.

Also, Bob, I would take a look at Steven Keen's work. He is a post-Keynesian economist and a Minsky-believer (Mish does not believe in Minsky Moments). Mish has referenced his work on the money supply, which, to say the least, is rather interesting.

Ultimately, Mish believes we will experience precisely what Japan has experienced with its two lost decades.

I honestly do not know if Mish is completely accurate, but he does make a compelling point. Frankly, what is needed, is an open and honest debate on how the money supply should be defined. If this debate can generate a logical consensus, then I believe we will finally move forward.

Perhaps this brief comment provides some assistance?

Gold will probably correct downward at some point, as will other hard assets and commodities. I do believe even Bill Bonner is forecasting something along those lines. Although, long term, gold and hard assets are where you need to be. Furthermore, as far as currency failures are concerned, the Yen is probably in noticeably more trouble than the USD, at least for now.
Just to be absolutely clear, Shostak has touched on the debt deflation concept in a relatively recent article. I do not believe he has touched on the idea that if house prices were included in the CPI that the resulting figure would be negative.

Nevertheless, I do always find Shostak's articles insightful and otherwise brilliant.

Also, Nikolay Gertchev wrote a very intriguing piece for titled "Securitization and Fractional-Reserve Banking" that I would love for you and other economists to comment on.
"Regardless of what the dollar does, do not expect oil to be blasting higher anytime soon." --Mish, 12/18/2008
Thanks BJP! What does Mish mean when he says if the dollar retraces its losses against the euro, then all commodities will be under pressure? It sounds like he's saying if the dollar weakens, then all commodities will see their dollar-prices fall. But does that make sense? Is there some Mish View that makes the conventional wisdom wrong on the connection between USD/euro prices and USD commodity prices?

I would imagine that his logic goes as follows: A weak dollar should be interpreted as the further slowing of the US economy (that is, a fall in aggregate demand) and therefore worldwide demand for commodities will fall even though they'll fall less so against the dollar than they will against the Euro.

Make sense?

I don't know that I agree ... but I hear what he's saying.
I still don't understand all this hubbub about gold setting new records. Back in Jan 1980 it hit $880 -- inflation adjusted that's $2500 in today's dollars.

This is one reason I have a problem with gold as an inflation hedge: it hasn't kept up with inflation!

If anyone has an explanation I would appreciate a better understanding of it.
Since 1980, after a bumpy first decade of being completely separate from gold, it looked like a world-wide fiat currency system could work (to the conventional). That would decrease desirability of gold. However, as it looks like the world-wide fiat currency system isn't working so well, people could want something with a longer track record. Fiat currencies are necessary for day-to-day operation, but who knows what a year will bring, other than more debt and a sluggish economy unable to produce enough tax revenue to fund the FedGov's ambitions of turning stones into bread and water into wine.
Since 1/24/02 to today, the dollar is down from 118.96 to 75.12 on the index. That is about a 36% decrease in the value of the dollar.

Gold is up from 278.30 to 1158.40 today in the same time span. That is an increase of about 316%.

This is why gold is looked at as an inflation hedge. Gold still virtually has the same purchasing power it did thousands of yrs ago, and during times of high inflation like the 70's you can see gold do something like go from $35-$850, an increase of about 2300%.
Bob -

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