Saturday, April 22, 2006

Debating the Bears

Those on gold's side (as I am myself as a matter of long-run principle) go to great lengths to look for the stats and defend of our position, given we're in the minority. Some day soon, I hope to acquire the necessary tools to do my stats myself, but in the meantime, I allow myself to "bloggiate" (my own word, pronounced "BLA-jee-ate") and read the honest efforts of others.

Douglas Noland is one of my favorite commentators/stat collectors. His latest column over at prudentbear.com, the Credit Bubble Bulletin, discusses what he describes as one Fed member's impression that they've just about "wrapped things up," i.e. conquered the inflation dragon, at least for the time being.


[Thanks to sjgames.com for the image.]


Doug accuses the Feds of playing a vital and irresponsibly happy-go-lucky role in today's global monetary chess, and I agree with him. He says:

" As the issuer of the world’s reserve currency, the U.S. economy has for decades enjoyed the capacity to inflate dollar denominated securities (Credit) at will.  Our competitive advantage in issuing top-rated and liquid securities has served us especially well over the past decade.  It was a key facet of 'reliquefications' and 'reflations' during periods of economic weakness and/or fledgling financial crisis.  The much trumpeted 'resiliency' of the U.S. economy and banking system owes almost everything to the capacity for the U.S. government and financial sector to endlessly create debt instruments readily accumulated by domestic and foreign holders.  Additionally, I believe a strong case can be made today that long-term yields would be significantly higher if it weren’t for the perception that the Bernanke Fed will aggressively cut rates at the first indication that the U.S. economic Bubble and/or Global Asset Market Bubble are beginning to falter.  The blundering Fed apparently not only believes that the U.S. economy is more resilient than in the past, it presumes it now has significant leeway to cut rates and 'reflate' when necessary."

As usual, he hits the nail on the head. The only nit I would pick concerns his interpretation of the recent bubbles in real assets sectors. In his view, "the nature of the current global Credit inflation (and attendant wholesale currency degradation) has manifested into a full-fledged flight to real assets sectors such as energy, metals and real estate" -- i.e. that people have finally understood that the dragon is going to win. Personally, however, I would have described the flurry of activity as a fishermen's race to the best fishing waters before the crowd gets there.

I have three reasons for saying the party may not be over yet:

1. The fishermen'll be back to the dollar at the first sign of reflation, i.e. when the Fed stops increasing rates.

2. There's still too much room for competitive currency bloating of our trading partners.

3. Cost-of-living equilization with our present and future trading partners still has a long way to go, i.e. we can count on finding a cheaper place to manufacture goods for the US market for a long time to come, helping to control prices.

These three factors could absorb the US dollar's bloat and continue to render US CPI inflation flacid, at least in the eyes of the Fed observer. So, I don't see that the flight is upon us just yet; however, I realize that he may be correct, because panicked flights have a way of creeping up behind you and going, "BOO!"

On the whole, though, I think all of the above scenarios, combined with what seems to be a market shortage of the metal, continue to be bullish on gold.

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