Posted on | August 30, 2011 | 6 Comments
The relationship between these factors is not entirely coincidental:
Gold prices soared Tuesday as Chicago Federal Reserve Bank President Charles Evans called for further monetary easing. The rally continued in after-hours trading after the Fed’s latest minutes from the Federal Open Market Committee meeting in August showed a growing number of presidents calling for more stimulus.
Gold for December delivery surged $38.20 to settle at $1,829.80 an ounce at the Comex division of the New York Mercantile Exchange.
The FOMC report is online here. It’s worth noting that gold is still below the record price near $1,900 it set Aug. 22, but the talk of more “easing” (Fed-speak for deliberate inflation) suggests that predictions of gold prices reaching $2,500 within the next few months are not unrealistic. My point is that rising gold prices cannot be dismissed as a mere speculative “bubble” so long as inflation undermines the dollar, bad fiscal policy undermines treasuries, and gloomy economic prospects undermine stocks.
The stock market nowadays is kind of a perverse measurement, as the talk of more stimulus from the Fed was cited as the cause for Tuesday’s $20 gain in the Dow Jones Industrial Average. In other word (a) the economy sucks, so (b) the Fed will do more stimulus, which means (c) cheap money for major financial institutions, so (d) buy, buy, buy!
If such dubious Wall Street logic worries you, you’re not alone:
Confidence among U.S. consumers plunged to the lowest level in more than two years as Americans’ outlooks for employment and incomes soured.
The Conference Board’s index slumped to 44.5, the weakest since April 2009, from a revised 59.2 reading in July, figures from the New York-based research group showed today. It was the biggest point drop since October 2008. A separate report showed home prices declined for a ninth month.
Let me point out something curious: Even though unemployment is around 9%, it’s been more or less stable at that rate for the past year. If the unemployment rate is not getting worse, then why is consumer confidence trending downward?
Simple answer: Inflation.
People get a lingering sense of unease when inflation silently erodes their earnings, even if they don’t have any reason to fear losing their jobs. And the biggest single asset that most people own is their homes, the value of which has actually been declining all year long. So they’re paying higher prices for consumer goods and services, even while the value of their homes decline, and it is thus hardly surprising that consumer confidence is down.
Think about what all this means: The housing market in the tank, consumer confidence down, Fed officials calling for “QE3.” As I’ve said before, “None Dare Call It Stagflation” – i.e., a return to the economic swamp into which Keynesian policy led us in the 1970s. And if this analysis is correct, gold is actually a bargain at $1,830.
However, because I don’t want to accused of hyping a “bubble,” here’s a video in which Alix Jones of TheStreet.com interviews market strategist Phil Streible, who is bearish on gold:
Streible may be right and I may be wrong. What do you think?