Thursday, July 10, 2014

The problem with gold and real interest rates

Blackrock has $4.4 trillion in AUM, according to Wikipedia.

Let's say Blackrock sees that real interest rates are negative, and mistakenly believes that negative real rates have anything whatsoever to do with the price of gold. So Blackrock decides to increase its asset allocation in gold by just 1%.

That increase in asset allocation would mean they'd have to purchase 1200 tons of gold. That's a significant percentage of annual production. The price of gold therefore skyrockets instantly.

There is far too much investment capital out there, relative to the price of gold, for an investment strategy based on Wall Street mumbo-jumbo to be pursued conscientiously; if capital jumps into the kiddie pool of gold, it becomes the market. You do not ever want to become the market.

This bullshit about real rates might have held twenty years ago, when Indians and Chinese were still dirt-poor and there wasn't nearly so much investment capital out there. But it doesn't hold today.

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