Economic Rebalancing

The global economy is horribly out of balance, with the United States going deeper into debt each year as a result of a huge trade gap. This blog describes the process of global economic rebalancing. If you have any comments or questions about the posts here, please don't hesitate to use the comments section.

Sunday, July 23, 2006

I Don't Like Gold as an Investment

Gold has outperformed the S&P for the last 6 years, or should we say that the S&P has underperformed gold. A lot of people are excited about that and justify gold and gold miners as an investment mainly because everything else is so unstable. But how stable is gold? Its value is purely a function of psychology. It doesn't earn you anything, like other asset classes.

In my mind, gold is a tool for speculators. One may be able to predict its movements based on macro-economic projections, but on the other hand it is especially ripe for manipulation to clean out small traders and force them into losses. Since there is no fair value for a commodity with only psychological value, Wall St. can squeeze the traders, while central banks can squeeze people who bet against their fiat regimes.

Former Goldman Trader Mark Lapolla blogged some good comments on gold here: Sixth Man Research: Don't Overthink Gold

The whole piece is good, but a couple of quotes in particular caught my eye:

"To economic and market forecasters, gold--and its ratio/relationship to other things--has been THE inflationary expectations indicator."

This bears watching, as I think inflationary expectations are very low right now, relative to the potential inflation that exists in the money supply right now. If confidence is lost in the dollar, a flood of currency could be returned to marketplace unleashing a tremendous wave of inflation in commodities, equities and property (going counter to the loss of faith in equities and property). This process has been going on for the past couple of years, but it could accelerate dramatically. Gold may be an early indicator or it may be suppressed.

"Gold mostly goes up because it's rising marginal price lends credence to its' mystery, and it falls, mostly because its' falling marginal price scares speculators."

This quote describes the psychology of the metal very well, in my opinion.

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