"The CPI and PPI have long been discredited in the eyes of most financial analysts. Even the Fed doesn't pay much attention to them any more. But these statistics are still trotted out every month to "prove" that there ain't no inflation."
(Gold Commentary - February 9, 2001)
Oh Oh! This is the first outright reading of "price inflation" on Mr Bush's watch, and it is a shocker. A 1.1% increase in the PPI is the biggest in more than a decade. The stock markets didn't like it. The Dollar didn't like it, with the $US Index falling nearly as much as it had risen on the previous day. The Treasury market liked it just fine, as money was re-routed to a "safe haven". Gold quite liked it too, with the spot future price rising $US 3.10. But Gold had fallen $US 4.30 on the previous day, so there was no real let up in the chorus of bearish comments about the yellow metal. Gold is widely held to be headed for $US 250 and then points south (many say considerably south) of that.
The usual piquant nature of what passes for market commentary re-asserts itself here. Regarding the PPI, the almost universal assessment is that the number was an "aberration". It won't be repeated next month. Having said that, there was the additional task of reassuring everyone that the fact that the PPI was an aberration means that the Fed will not be derailed from their plans to keep on cutting U.S. rates. Finally, that hoary old chestnut - Stagflation (rising prices with falling "growth") raised its head again. "Don't worry (say the pundits), prices can't rise even though business input costs are rising. Business can't pass on their increased costs to consumers". The moral of the story. NO INFLATION - NO MATTER WHAT!
Of course, what had to be at least mentioned in passing was the fact that if businesses are facing higher input costs and can't recoup them by raising the prices of what they produce, then business profits are likely to keep falling. Oh well, that just means that the Fed will have to lower rates a bit harder than would otherwise be the case.
But the best "proof" that this PPI number was indeed an aberration was the Gold price. We find it interesting that Gold finally gave up its struggle to stay in contact with the $US 260 level on the day before the PPI was announced. We also find it interesting that Gold broke down on that day in New York, after the London market had closed. Finally, we find it interesting that according to reliable reporting, it was not just the "funds" which piled into the Gold selling in afternoon trading on Feb. 15, U.S. banks joined in the action. Does anyone out there think than no-one in the U.S. knew about this PPI number before it was released on Feb. 16? We don't. All that's necessary to reach that conclusion is to contemplate what happened to Gold - and the U.S. Dollar - on the previous day.
Definition: The term "bubble" is a useful one in financial analysis, referring as it does to any market which has seen prices blown up to disproportionate levels. But, in this context, what is the opposite of a "bubble"? We don't know of a convenient word to use, but if one wants to describe the present $US Gold "price", that is what we are seeing. How about an "elbbub"? Kinda catchy - don't you think?
Here are the Gold in "foreign" currency charts:
Gold in Euros
Gold in D-Marks
Gold in Aussie Dollars
In financial markets, a "bubble" expands until it explodes - Japan in 1990, the Nasdaq in 2000. An "elbbub" contracts until it cannot contract any further. What we are waiting for with Gold is evidence that such a state of affairs has arrived.
We are still waiting for that evidence, although the one day $US 4.30 fall followed immediately by a $US 3.10 rise shows that Gold is at least shaking out of its lethargy of the past few months. If you were a contrarian, you could not have better evidence that Gold is about to stage a turnaround. Almost everyone is sure that the price is about to plummet to prices not seen for more than 20 years. The evidence is overwhelming that the U.S economy is ALREADY in recession, not merely waiting to go into one.
Yes, we know that the falling Gold price is held up as evidence of these "recessionary tendencies". But consider the effects of an economic slowdown in an economy which is absolutely glutted by debt and has absolutely NO savings to tide it over any bad times, no matter how long or short their duration. Inevitably, the viability of the investment vehicles which have sustained the economy through the boom come into question. After that, the advisability of keeping wealth in the currency of the economy being affected comes into question. And throughout, a quest intensifies to find an asset which has been selling at very low prices relative to everything else.
In a recession, and/or when a recession is expected, capital preservation becomes paramount. In such a scenario, most people look for assets which have limited downside risk. By all historical standards, $US Gold has VERY limited downside risks. But, everyone is confidently predicting that it is about to plummet in price.
If Gold is NOT going to emerge as a possible source of diversification away from the REALLY risky investments, it had better plummet in price SOON. If it doesn't, it's lure is going to grow inexorably, even if the $US Gold price does not improve. The call is out: "Gold's Gonna Crash!". It had better. It's about the only 'THERE IS NO INFLATION' indicator that the financial powers that be have left.
Only one thing is certain right now. If the Gold price DOES crash, then the financial and economic situation of the U.S. is dire indeed. Remember, the last time Gold "crashed" was at the start of the Asian Crisis. This time, it will prove to be (if it happens), right at the start of the U.S. Crisis. We'll see.
