Perspectives On Gold's "Parabolic" Catch-Up Phase

Tyler Durden's picture

Via Lee Quaintance and Paul Brodsky of QBAMCO,


No Pretense

Since 2007 our analysis has suggested the likelihood of economic outcomes that most have considered unlikely: significant and ongoing monetary inflation, policy-administered currency devaluation, substantial global price inflation, and an eventual change in how the forty year old global monetary system is structured. Most observers have viewed such outlooks as tail events – highly unlikely, unworthy of serious consideration or a long way off. We remain resolute, and believe last week’s movements in Frankfurt and Washington towards perpetual quantitative easing confirmed and accelerated the validity of our outlook. A summary reiteration seems in order.

We all know QE began a few years ago in the US and UK with the first rounds of base money creation. This debt monetization came on the heels of Treasury’s 2008 TARP bailout, ironically the broad recognition of a tail event – a credit crisis that had been quietly building for years. Since then, global central banks have been taking turns diluting their currencies through repeated base money issuance, devaluing one at a time against the others. While prices of goods and services bought on credit have since been soft, declining or rising only mildly to reflect the natural demand for credit; monetary inflation has pressured prices of unlevered items with inelastic global demand properties higher, most notably precious metals and natural resources.

(We caution against believing that an increase in aggregate global demand, bad weather, impending conflict in the Middle East, or overzealous futures market speculators have been the cause of higher commodity prices. Such conditions represent a natural and ongoing state and commodity supplies adjust. Rather, we argue there is now far more paper chasing basically the same global supply/demand equilibrium for various commodities, and so resource producers are demanding the same purchasing power in exchange by raising nominal prices.)

Logic and history do not support a correlation linking base money growth to sustainable real output growth. At best, there is a lag period that may ultimately result in temporary nominal output growth. While base money inflation may ostensibly bring forward the time until a new credit cycle can begin (because it de-levers bank balance sheets), such a policy raises global resource pricing coincidentally. Resource providers have incentive to raise prices immediately, yet there is no such market-driven incentive among consumers to increase borrowings.

The money flow today is viscous, to say the least. Against this backdrop, there should be very little pretense among objective observers that last week’s perpetual QE announcement could actually provide real economic stimulation. From a policy management perspective, central bankers are no doubt aware that consumer demand is unaffected by base money inflation unless and until a new credit cycle emerges. As we have seen, newly created base money is not finding its way to debtors or to fully-reserved private sector creditors, but is instead being parked on the balance sheets of under-reserved banks (and ironically called “excess reserves”). In reality banks are de-levering their loan books with newly-created reserves they have lacked.

The specific (but not fully articulated) goal of the Fed and ECB is nominal money stock growth via unreserved bank credit growth. This is pro-leveraging in general and is usually a win/win for banking systems and broader economies; however, it is lose/lose when unreserved bank credit ceases to grow or begins to contract, as is currently the case. So, nominal base money growth, to which central banks have now gone all-in, is orchestrated with the primary goal of restoring nominal bank credit growth and, only tangentially, nominal output growth.

Is what’s best for banks best for their economies? From 1982 to 2007 the two objectives were aligned, at least temporarily. Increasing unreserved bank credit growth allowed the majority of households and businesses to use leverage to build capital and the appearance of sustainable wealth in real estate and financial asset portfolios. In the current economic environment; however, it seems impossible to determine whether banks even have the ability to expand their balance sheets further, thereby providing the basis for a new cycle of credit expansion, or whether consumers have interest in assuming more debt. Nevertheless, policy makers and most professional observers see base money creation as the only option remaining to sustain over-leveraged economies, and so they seem united in looking the other way while the non-bank private sector (primarily unlevered savers) effectively bails out the global banking system, and while the takers of credit (debtors) continue to languish.

The balance sheets of non-bank creditors and debtors are not being improved and base money inflation can do nothing for sustainable real demand, real income, or real returns on most financial assets, and so the economic merit of QE is rather dubious. Simply, central banks cannot de-leverage credit systems in real terms (a relative concept) by promoting the expansion of the credit stock in nominal terms (an absolute objective).

Let’s further summarize and explore current events:

  • Further base money creation through debt monetization is the most politically viable means of de-levering banking systems, which seems to be the true priority of central banks. The only economic rationalization for QE? is eventual flow-through credit expansion from banks to the rest of us, which theoretically could temporarily increase financial asset prices and economic activity.
  • Last week, Chairman Bernanke said: “The tools we have involve affecting financial asset prices. Those are the tools of monetary policy. There are a number of different channels. Mortgage rates, other rates, I mentioned corporate bond rates, also the prices of various assets. For example, the prices of homes: to the extent that the prices of homes begin to rise, consumers will feel wealthier (and) they’ll begin to feel more disposed to spend. If home prices are rising they may…be more willing to buy home(s) because they think they’ll make a better return on that purchase. So house pricing is one vehicle. Stock prices: many people own stocks directly or indirectly. The issue here is whether improving asset prices will make people more willing to spend (i.e. more willing to borrow – Ed.). One of the main concerns that firms have is that there is not enough demand…if people feel their financial position is better (then) they’ll be more likely to spend…” To which we would inquire in response: “what exactly does Mr. Bernanke expect consumers to spend and what does he expect consumers to demand?” Plainly, the Chairman hopes easier credit conditions would bring higher financial asset prices, which in turn would induce consumers to assume more debt with which to consume goods, services and even more assets. The implication is obvious: the Fed’s only hope is now reduced to trying to re-ignite a credit bubble ahead of commodity price increases, which in turn increases input costs for finished goods, reduces economic activity, and transfers wealth to resource providers from resource consumers. As noted above, real growth cannot be orchestrated through this policy. (Could the Fed be guilty of relying on an econometric model that adjusts supply and demand in one currency, without considering the incentive of global resource producers to migrate away from currencies being diluted?)
  • As the Fed continues monetizing MBS, mortgage and other tertiary market yield spreads (including equity dividend and earnings yields) should continue tightening to Treasuries. We would expect policy makers to greatly encourage further declines in nominal mortgage rates in the hope of a renewed housing boom. This would imply the need to further drop Treasury yields with five to seven year durations to maintain a positive spread. Financial asset markets should generally continue to rise in nominal terms (the outcome Chairman Bernanke targeted in his comments last week). Since the economic efficacy of such a financial scheme relies on both homebuyers’/refinancers’ willingness to assume more debt for larger or newer homes, and on further Treasury yield subsidies, it seems obvious that $40 billion/month in MBS purchases should be considered the minimum for future QE.
  • We believe QE via debt monetization in this manner will not provide economic stimulus. Homeowners use rational cost/benefit analyses. Lower home re-financing rates or potential home equity gains would have to be perceived by the public to be worth the risks of potential illiquidity and equity losses, risks they recently experienced. Given already record low mortgage rates, low home equity levels, a zero-bound rate structure, an overcapacity of existing homes, and an aging US population, we would argue that significant re-leveraging will not occur in the US housing market. Central banks would need to find another outlet for consumer credit to successfully stimulate economic activity.
  • Most of the largest global sovereign economies rely directly on a finance-based model for nominal output growth – a model wherein increasing public and private balance sheet leverage drives nominal GDP higher, which further helps to service outstanding nominal debts with the creation of incrementally new nominal debts. Output growth in more commercially-driven economies, notably China and Germany, also relies greatly on further consumer leveraging in finance-based economies.
  • Without a black swan innovation that affects the capital producing potential for a great number of workers in finance-based economies, it is highly unlikely that developed and developing economies can experience real output growth (nominal growth adjusted for debt growth and purchasing power loss across all currencies relative to items in relatively fixed supply with inelastic demand properties).
  • We continue to believe the logical economic outcome is global stagflation – stagnant or contracting global real output coincident with substantially rising prices of commodities and rising input costs of finished goods. A trend towards stagflation seems to have been firmly set in motion already.
  • Unlike 1979-1980, monetary policy makers will not be able to resurrect the purchasing power of their currencies by raising interest rates (or this time by withdrawing base money from the system), because the balance sheets of governments, banking systems and households are already deeply indebted, impaired, and unlikely to be meaningfully improved without currency devaluation. Tightening credit in the current environment would most certainly bring on a deflationary depression.
  • Once banks are deemed to be sufficiently de-leveraged through debt monetization, we believe central banks will begin monetizing assets as a means of explicitly devaluing their currencies. As we have argued, the asset of choice will be the only monetary asset already held by global treasury ministries and central banks and the one with recent precedent collateralizing global currencies – gold.
  • The policy-administered currency devaluation we have envisioned would involve a central bank publicly tendering for gold at an increased exchange rate (i.e. price). For example, the Fed would purchase gold with newly created US dollars, which would bring the ratio of USD-denominated credit-to-base money back into line, thereby de-leveraging the system. (This inflation would increase prices and wages relative to outstanding debt balances, greatly reducing the burden of debt repayment.) Global currencies might be re-pegged to the US dollar which would in turn be exchangeable for gold at the higher price, as per the Bretton Woods system. Of course, other central banks might try to make their currencies exchangeable directly into gold at another exchange rate. (We await the arbitrage.)
  • Were a USD devaluation and re-pegging to occur as of the end of 2014, following 2 ¼ years of $40 billion monthly MBS debt monetization, we estimate our Shadow Gold Price would approximate $15,000/ounce. (The SGP divides the quantity of USD base money by the quantity of US official gold holdings, as per the Bretton Woods monetary regime.) Over the weekend, Bank of America analysts implied USD base money inflation would increase much more than the Fed announced, to about $5 trillion by the end of 2014. This figure would imply an SGP a bit over $19,000/oz.


We are often asked when we see our scenario playing out. Our answer has always been twofold: first, current conditions and policy responses confirm it is playing out now; second, it is impossible to say when the parabolic “catch-up” phase gets underway because that depends on the interplay between the general public’s understanding of the forces behind consumer goods and service price inflation, the pressures on real returns in most financial assets, and the reflexive political pressures and policy responses to them.

Nevertheless, we suspect last week’s events, in which both the ECB and Fed committed to open-ended base money creation – against a geopolitical environment in which China’s USD reserves are being held astride an increasingly dynamic domestic political regime and in which the petro-dollar regime of the past forty years seems under attack – may be the catalyst that begins to raise public awareness of the link between monetary inflation and price inflation.

Inflation indexes such as the CPI are contemporaneous indicators of price level changes. If our analysis is right, very little capital will be properly positioned when consumer price indexes begin to flare. The relatively tiny current universal allocation towards perceived “inflation hedges” seems to bear this out.

We believe significant real Alpha will be generated by those properly positioned first for significant monetary inflation and monetary regime change, and second for significant price inflation. We believe nominal returns using this sequencing will be substantial (far greater in fact than were available to short positions in sub-prime loans in 2007).

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Robert-Paulson's picture

More right-wing Media Bull Crap to get people to buy Gold under the non-sense of "Fiat Currency".

To be exact:
We pay for Gold with US Dollar, European Euro, Israeli Sheqels, Japanese Yen, etc.
So if US Dollar, Euro, Japanese Yen, etc. are "Fiat Currency" then Gold is a "Fiat Currency" since we pay for Gold with these currencies. That is we can step to any Gold counter and pay them US Dollar to take their Gold away, so who now has the "Fiat Currency"!

So to have as your so called philosophical basis that "Fiat Money" and "Gold is only real Money" is absolutely insane. But that is what the Republican party, specially its lunatic Money wing, such as Ron Paul are.

Now you may argue that Gold is an investment, which would be a somewhat rational argument, compared to such insane talk as "Fiat Currency", but then as an investment Gold is one of the Worst since it pays NO dividend, you can not wear it, you cannot live in it, ONLY thing you can do is hope for a BIGGER fool to pay you more for it.

MillionDollarBonus_'s picture

In June of 1998, Professor Robin Hanson of George Mason University suggested that an economic singularity may be just around the corner. An economic singularity is a period of exponential growth, where the economic landscape changes dramatically and prosperity multiplies by many factors in a very short period of time. I believe that the US Treasury market is a precursor to an economic singularity.

Let me explain:

In 1980, the peak yield on the 30 treasury note was 15.20%. Since then, there has been a steady flow of money into US treasuries due to a growing confidence in the responsibility and trustworthiness of our congress and central banking officials, and today that yield is a phenomenal 2.80%! If this trend continues at an exponential rate (and there’s no reason to believe that it won’t), the yield on the 30 year note will soon be sub 0.01%. It may be hard to believe, but this IS possible, and its implications are far-reaching. With treasury yields at sub 0.01%, our government will be able to borrow at next to nothing, allowing our congress to finance lavish lifestyles for all Americans, with extended benefits and unlimited paid leave for government workers. This is a real possibility in America, and I think this calls for more optimism and positive thinking, and less doomer fear mongering.

Diplodicus Rex's picture

 +1000 MDB_ Exactly. Spot on. There's no actual need to work at all. Every time you need to eat or fill the car with fuel you should just be able to print the money out of thin air then we wouldn't have all that debt nonsense to contend with.

Whiner's picture

All praise and glory for MDB! A reader can't determine whether he is the Master cynic or highly paid Treasurery Troll! And that's where his mastery lies! In either case, keep it coming, MDB!

ZeroSpread's picture

MDB, you forgot to address the close correlation between falling treasury yields and PM prices (R=0.9914159). This would have underlined your sympathy for the right investment strategy further.


Regardless, you understood fight club.

CIABS's picture

I don't monitor MDB, but it looks like he's tipping his hand lately.  Clearly a comedian, not a troll.  The dispelling of the mystery makes him a lot less interesting, in my view.

DoChenRollingBearing's picture

Ha ha.

We are in Taranto (Italy, SE part) which was founded by the Spartans in some 796 BC.  It was considered to be the richest city  in "Magna Grecia" (the Greek Empire) with LOTS of gold.

In fact, the ad the Google just brougth up is an Italian buyer and seller of gold (Or maybe commodities in general).  Take a look:

I am still seeing (and documenting) signs and stores everywhere around here re offers to buy Italian gold...

StychoKiller's picture

Stating facts is not retardation, but single word comments are! (-1 for you)

Papasmurf's picture

There's an iPhone app that does that.  It uses QE codes.

Diplodicus Rex's picture

Two down arrows???? Are you out of your tiny little fucking rehypothecated mind?

cynicalskeptic's picture

And damn near everyone in ZImbabwe was a Millionaire or BILLIONAIRE before the currency totally collapse and the value went to zero.  The Zimbabwe stock market was also the 'best performing' in Africa at the time with ever-increasing share prices.

With $Zim 100 TRILLION notes being the highest denomination printed, being a 'millionaire' or 'billionaire' means wou're STILL broke.  An 11.2 MILLION PERCENT inflation rate is no good for anyone (except the paper supplier for your currency printer.)


Beb Bernanke may go down in history as the US version of Gideon Gono  - doing far more damage as the $US affects far more than the US population.

cifo's picture

MDB, this is your best so far.

Great analysis, great conclusion.

Al Huxley's picture

That was fucking AWESOME MDB!  This is far and away your best post, and the best articulation ever of what we're collectively meant to believe in happening as indicated by UST yields.  Well done!

Eally Ucked's picture

I think it will be much better than you predict. Everybody will pile-up to US tresuries even at -5%! So basically they want us to maintain our standards of living and lead the world to future Nirvana in US$ world!

hapless's picture

Well said, E.U.

My wife was born and raised a Theravada Buddhist.  She loves it when people use the word "nirvana" as a substitute for "ecstasy".

As wikipedia says: "The word literally means 'blown out' (as in a candle) and refers, in the Buddhist context, to the imperturbable stillness of mind after the fires of desire, aversion, and delusion have been finally extinguished."


DosZap's picture

 to the imperturbable stillness of mind after the fires of desire, aversion, and delusion have been finally extinguished."

Sounds like like right after really hot sex.

SAT 800's picture

Fine with me; the less doomer fear mongering and the more optimism; the more I'm going to make on my Silver Bullion when the roof falls in on your head. You see there is such a thing as reality; and it;s a bitch.

The Continental's picture


I must congratulate you on posting economic scatologic thinking so exquisitely vapid and dripping with monetary turpitude that the sane and rational amongst us are stunned into utter silence. There is no logical retort to such pure idiocy that can be made without appearing supremely superfluous. A pile of excrement is recognizable by all, and only achieves needless exaltation when it's value is for an instant entertained.

Muppet of the Universe's picture

You have achieved God status.  I hereby knight you the Grand Wizard of Knightmares and 33rd degree Master of Crap, they Defaulted Obligations. 

You are the greatest ZH poster of all time, and I bestow this song upon you.  May God have mercy upon your soul.

Diplodicus Rex's picture

Duh, you can't eat it either apparently.

Esso's picture

Well yeah, but gold & silver have caused so many maritime mishaps to ZHers that it should be outlawed for safety's sake.

I know, I lost all my PMs in a bizarre boating accident.

DosZap's picture

In Mr.T's vernacular, FOOL!!!!!!!!!!!!!!!!!!!!! yo sho can ware it!!!!!!!!!!!!!

Urban Redneck's picture

Perhaps they've never been to a gold market in MENA or the subcontinent... where gold bangles are the preferred medium of exchange.

SumSUN's picture

A bigger fool is not needed for the price to increase.  Gold and silver have everything they need right now for the price to rise.  Here'e one for ya, Timothy Geithner....  10 other reasons are coming to mind right now, but I'm too busy shoving my face with popcorn.  

akak's picture

The "bigger fool" (if not the biggest fool) is in fact he who naively and ignorantly ignores the fact that his fiat currency is currently being devalued RIGHT NOW, and that every fiat currency is soon going to experience a dramatic if not devastating decline in real value.

Think for yourself's picture

I'll be buying all the gold and silver I can (hint: not much) until they touch 2000 and 50, respectively.

By then I'll probably revise these numbers to 2500 and 80, because that'll still be a deal considering how fucked we are. Problem is, I don't think that new interval will last long...

fiddler_on_the_roof's picture

Then tell me - Why are CB's holding and continuing to load up Gold "only" ? (Not Silver, platinum...)

SAT 800's picture

Scale factor. The Silver market in dollar value is tiny compared to the Gold Market. Professionals never want to cause a price rise in a marke they're entering. Tradition. Psychology. All these reasons. For the individual, the cae is different. 100% Silver is correct for the individual. to comment on Platinum is to enter into a discussion with a fool; which merely indicates that one himself is a fool.

Snidley Whipsnae's picture

The PBOC and many other SE Asian/Mid Eastern central banks AND soverign wealth funds are continuing to 'load up'.

Simply because Westerners have been brain washed into believing that fiat is the end all do all does not mean that the entire world takes the same view.

How many fiats have the Chinese seen come and go in the past 5,000 years?


Dr. Engali's picture

We already have a resident troll with MDB, only he is a pretty good troll because he is funny. You....well you're just lame.

Top_Kill's picture

Your precious fiat pays not interest either. Can you say ZIRP! I guess it is not money.

KingTut's picture

Bob, we're a little wet behind the ears .. eh?

Gold is NOT fiat currenct, by definition.  It comes out of the ground, not out of a mint.  Fiat money come in three varieties: coin, paper and electronic.  The paper currency has symbols printed on it, with a number indicating how much its "worth".  You can't eat it, but if you're cold you can burn it. Coins are metal slugs with symbols stamped into them  You can't eat or burn coins, but you can melt them down and make something useful.  Electronic currency isn't really money, but an entry in the books of a bank.  Somebody said he robbed bank because "that's where the money is".  Ironically that's not really true.  Banks keep a relatively small amount of paper moneyto reload their ATMs etc., they have coins too but they're a nuisnace. Banks create electronic money out of thin air everytime they make a loan.  Your deposit is just used as a reserve for more loans.  Very weird system.

Fiat currency gets its name from how the government forces people to use their "money".  You can only pay taxes in legal tender.  In addition debts can legally be paid with legal tender, and government fines have to be paid in legal tender, and courts settle disputes in legal tender.  Of course, the government dictates that bank money, the electronic entries in their books, is also legal tender.  That's why you can pay your taxes by wrting a check.

Gold on the other hand competes wth legal tender fiat currencies becaucse the government cannot create it, the cannot give it value or take its value away.  Now that Iran is subject to sanctions, they are using gold to buy internationally.  Gold is accepted everywhere in the world, no questions asked (except is it real gold?).  Governments come and go, and their currencies come and go, but gold's value survives all of that.  If you own a gold coin, it could been Cleopatra's jewlery, Napoleons treasury, or stolen from the Chinese during WW-II.  It can't be fiat because the government has no jurisdiction over its existence or value.

Of course, governments hate gold, so they tax it, confiscate it, hoard it, steal it, and generally make you think its junk money.  But the only reaosn they do that is because they can't really control it, only your perception of it ... if you're stupid enough to let them.

Smartie37's picture

Ho Ho Ho --- Merrrrry  Stupid !  

Let's make it real simple: 

A silver dime buys 1 gallon of gas in the 1950s

A silver dime exchanged for fiat buys ~1 gallon of gas in 2012

A fiat dollar buys ~10 gallons of gas in the 1950s

A fiat dollar buys ~1/3 of a gallon of gas in 2012

Lot's of anti-Gold folks on this one..................WHY ?????????????????

To "protect us" from protecting purchasing POWER ????????????????????????

Colonel Klink's picture

A fiat dollar buys ~1/4 of a gallon of gas in 2012.


Fixed it for you.  Good post otherwise.

Getting Old Sucks's picture

Uh, I can only get less than a quarter gallon of gas for a buck.

lasvegaspersona's picture

His name was robert Paulson

no wonder they killed your character off in the are illogical

I pay for gold with paper....therefore gold is paper???

incognito's picture

Gold is not fiat because it can not be produced in infinite quantities for a minimal difference in cost. Gold can only be produced by mining and refining that uses up time, effort, and capital. Duh.

SAT 800's picture

You are at least somewhat familiar with the human race and its behavior, and you doubt there will be plenty of greater fools? The supply of greater fools will prove to be very adequate; on this point you need have no concern.

marathonman's picture

All money is fiat.  Money is just an idea.  It's only value is as a means of exchange.  Gold has been considered money through the ages because of its inertness, divisibility, rarity, etc.  But really it is based on an idea that its worth exchanging.  It also doesn't have counterparty risk.  A gold coin in your hand is unencumbered by someone elses ability to pay and it has to be dug out of the ground providing a cap to its availability. 

While it doesn't pay a dividend, it holds its purchasing power because of its rarity and governments propensity to print money out of thin air to pay unpayable promises in political vote buys.  Oh, and you can wear it.

Gold and silver is the currency of last resort when everything in Federal Reserve Note land has gone FUBAR. 

thewhitelion's picture

I'd like to be the first to congratulate you on your compelling use of "quotation marks" around the words "fiat currency."  Finally, I see the error in my ways.  (Plus, "fiat" might have "floated" in my "boating" "accident" "."

Darth Rayne's picture

Gold is a yellow metal, it conducts electricity and is very maleable. So say metallurgists.

Gold is not money, so says Ben Bernanke.

I have exchanged all of my excess currency for some gold. I may be a fool but I would be a BIGGER fool to ever swap my gold for US Dollars, Euros, Japanese Yens, british pounds or any other form of money that someone else can devalue to nothing with a few key strokes.

An ounce of gold today will be an ounce of gold in a thousand years. What will $1700 dollars be worth in a thousand years? How about 100 years? What about 10 years? Next year?

The West might see gold as a commodity. The East don't. I don't.

I believe I am swapping, what will be worthless, bits of paper with numbers on for actual wealth. I don't care if I am right or wrong. I slept better after removing my money from the bank. Most of my material wealth now rests in Zurich and London. None in NY.

I couldn't care less about my paper wealth.

EmileLargo's picture

So if US Dollar, Euro, Japanese Yen, etc. are "Fiat Currency" then Gold is a "Fiat Currency"


Vincent Vega's picture

What is this; troll day at ZH?

emersonreturn's picture

Vincent Vega...other than Max F the whole gang's playing Benny G's song.

CClarity's picture

QE for indefinitely but maybe forever is code for the Fed (and other CBers) can't figure out any way to stimulate demand, so trying to keep economy afloat by feeding equity whiners . . . but won't help keep any loft under the economy itself.  Eventually, the debasement of the US$ will translate into inflation above 10%, moving quickly to 25%, in food and energy.  While the Fed and other traditional economists will point out that they prefer to look at the number ex food and energy (of course they do, it includes housing and labor wages which certainly aren't experiencing loft except in a few specific areas).

When the inflation really gets going, Fed won't have chemicals to extinguish.  The speed with which hoarding of food and various energy products will outstrip the inflation and then the vortex of one pushing the other will be underway.  Gold, arable land with protection, water, and ways to home power folks.

dick cheneys ghost's picture

What about the Silver?????