Rosie On Gold Redux

Tyler Durden's picture

Rosie brushes off the WSJ's allegations that gold is nothing but a ponzi, and explains why despite a prevailing (currently) deflationary environment, savers throughout the world have forced global gold dealers to run out of inventory. "It is a reflection of investor concern over the monetary stability, and Ben Bernanke and other central bankers only have to step on the printing presses whereas gold miners have to drill over two miles into the ground." - pretty simple really. Everything else is just obfuscation.

We receive emails all the time asking how gold fits into our deflation view. Well, for one, the widespread consensus that gold is an effective inflation hedge is not on the mark. Our statistical analysis shows there to be a fairly loose link even if gold is a store of value. We also know that in the deflationary 1930s, the Sterling price of gold doubled. Gold is also a hedge against financial instability and when the world is awash with over $200 trillion of household, corporate and government liabilities, deflation works against debt servicing capabilities and calls into question the integrity of the global financial system. This is why gold has so much allure today. It is a reflection of investor concern over the monetary stability, and Ben Bernanke and other central bankers only have to step on the printing presses whereas gold miners have to drill over two miles into the ground.

The bottom line is that gold makes up a mere 0.05% share of global household net worth (see page 22 of the FT) and so small incremental allocations into bullion or gold-type investments can exert a dramatic impact. Gold cannot be printed by central banks and is a monetary metal that is no government’s liability. It is malleable and its supply curve is inelastic over the intermediate term. And central banks, who were selling during the higher interest rate times of the 1980s and 1990s, are now reallocating their FX reserves towards gold, especially in Asia.

Gold is in a secular bull market, actually it has been for over a decade and double from where we are today, in my view, it’s a very easy call. And, if inflation is really the be all that ends all for the gold price, then keep in mind that gold has rallied five-fold since 1999 and yet inflation is the same today as it was then and the core rate has been cut in half. Go figure. Maybe the bottom in gold prices occurred at the same time that global production peaked — maybe it is a bull market rooted in little more than a shifting supply curve.

The biggest problem with gold, however, that Rosie so blatantly ignores, is you can't eat the damn thing. What the hell are you supposed to do with a monetary equivalent you can't eat?