Saturday, December 10, 2005

Spinning Gold

The Cunning Realist says that gold is up and that confirms what we already knew about the economy: it's overburdened with debt, particularly official debt, and inflation is highly likely.
Gold represents many things to different people, but essentially it's a proxy for excess liquidity. When there's too much money around, the price of gold generally rises as people try to maintain purchasing power against the effects of inflation.

I've been bullish on gold for several years because of the irresponsible fiscal and particularly monetary policy in Washington. For the past few years, the Federal Reserve has reacted to every minor bump in the economy or the stock market with a massive round of fresh liquidity. In the nanny state, economic weakness---or, God forbid, cleansing of overcapacity and malinvestment---can't be tolerated. This is particularly true during an unpopular war led by an unpopular president. Gold loves the nanny state. It adores offensive wars started by politicians who spend without considering the consequences. Regardless of what one thinks about George Soros, one of the all-time great quotes about politics and the financial markets belongs to him: "All of economic history is one lie and deceit after another. Your job as a speculator is to get on when the lie is being propagated and then get off before it is discovered." Gold is the ultimate polygraph machine. It stands as a silent sentinel, taking notes on what it sees and reacting accordingly. Thus, the fresh 24-year high in its price. [emphasis added]
I'm reminded of Robin Hahnel's rules of credit markets:
There are two rules of behavior in any credit system:
Rule #1 is the rule all participants want all other participants to follow: DON’T PANIC!
Rule #2 is the rule each participant must be careful to follow herself: PANIC FIRST!
What makes the Cunning Realist's analysis particularly interesting is that he's got the pre-spin cycle all figured out:
And in that regard, here's a bit of advice for the "no consequences" bunch as they prepare to explain away gold's rise. They've done an excellent job of perpetuating the "we're running out of oil!" meme in order to disguise the link between excess money creation and higher oil prices. With gold, start with the line that "gold is reflecting increased prosperity, so higher gold prices are a good thing." When that gets old, trot out "gold is an ancient, barbarous relic." As the desperation builds, try "it's unpatriotic to own gold." Eventually, establish a mantra that "gold is the currency of terrorists." And when there are no more pages in the script, conjure up FDR's spirit for advice on what to do next. [In 1933, Roosevelt outlawed the ownership of gold by U.S. citizens as the government tried to remove any constraint on its ability to reflate during the Great Depression (history buffs can view a copy of FDR's executive order here).]
I would point out that "gold is the currency of terrorists" is a meme that's already out there, with regard to the US attempts to make the entire international banking system transparent to US anti-terrorist agencies. So they may already be ahead of us on this game...

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