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Friday, July 4, 2014

More John Kaiser, with comments from moi


John Kaiser - blah blah gold. Same link as I just gave you earlier today, but I'm re-posting it so as I can feel better about quoting a big chunk of it:

Michael Berry regards the multi-decade low and steep downtrend as a sign that the enormous increase in the money supply created by quantitative easing has failed to stimulate the economic activity needed to grow the economy organically and pose an inflation risk. The people of America are paralyzed with fear about the future; the shriveling middle class has no spending power and the elite has no desire to spend its accumulating net worth. Banks are not lending because there is no vision of America's economic future, businesses are not investing capital because they do not see a growing consumption demand, and the wealthy are preparing to ride out the deflation that will accompany the return of interest rates to normal levels. But Michael Berry also warns that this spending aversion could turn around quickly, bringing on inflationary pressures that the Federal Reserve may be reluctant to move against aggressively for fear of spooking sharp declines in the bond market that brings back the deflationary threat. It is a frightening tightrope situation. A near term path out of the gold narrative trap would be a scenario where something triggers a rise in American consumption that risks a return of inflation that in turn spooks an anticipatory rush back into gold. This is the fingers-crossed hope for a September 2014 rally in the junior precious metals sector. But the drumbeat from Wall Street is that the economy is improving, the taper will end quantitative easing, inflationary pressures are far in the future, and there is no reason to own gold.

Note that this is why I find interesting Michael Shaoul's call for a near-term rise in US inflation. And that call seems to be starting to catch on among the Wall Street crowd.

Not only do I think that Wall Street's assessment is wrong about the underlying strength of the economy, but I also think that if something could trigger a perceptual inflection that unleashes a credit expansion that restores robust, broad based growth to the American economy, my predicted impact on the price of gold is the exact opposite of Wall Street's prediction. [...]

And I agree with this. The key to increasing the gold price is increasing demand; and the way to increase demand is to increase net wealth in Asia because Asians are the only people who buy gold.

Wall Street will eventually embrace my alternative gold narrative, but not until it has pummeled the prevailing poisonous gold narrative into dust, an exercise with which I have some degree of sympathy. That, and a return to robust economic growth, I'm afraid will still take several years during which gold could stay stuck in a range of $1,000-$1,500 where the economics of putting advanced gold deposits into production are lousy in most cases, the profitability of most operating mines is marginal, and the bar for what counts as a major exploration discovery is very high. Only severe geo-political stresses could drive gold prices sharply higher in the short term, but the eruption of such gold price drivers, and their sustainability, are unpredictable and belong in the category of "be careful what you wish for".

I disagree. I think if it weren't for the Chinese collateral situation and the weak Indian monsoon, we'd be seeing gold rise strongly this year.

In fact, maybe we already are; problem is we won't really know til the end of the year, since the present gold strength might just be the old seasonality thing. I think Whitey can't generate enough gold investment demand to swamp out weakness in Asian physical demand, but maybe I get proven wrong.


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