Gold's Long Decline Is the Real Story … Equity markets started off this year by falling. They rallied in February, working their way back into the green. The Standard & Poor's 500 Index now is up about 1 percent for the year. Gold has traveled the opposite path … – Bloomberg
Dominant Social Theme: Gold is a bad investment.
Free-Market Analysis: We track dominant social themes and this is a consistent one: Don't invest in gold.
Gold traveled up against the dollar to nearly US$2000 an ounce, but you wouldn't know it from the mainstream media. Most of the coverage gold received was negative and took place after the metal for some reason started to plunge in price.
There wasn't any reason for the plunge that we could see. It's under US$1200 an ounce and we still can't figure out why. We were told, even in the midst of gold's fall, that it was because a "recovery" made gold less of a "safe haven."
But we're talking about two years ago. Where's that recovery? What happened? Gold went down fast but the recovery never happened. Strange, isn't it?
Of course, there's a big split in the investment community regarding gold, even among "gold bugs." Some say the market is so large and varied that it can't be "fixed." Others have spent a full career investigating manipulations that they claim move gold and silver around almost at will.
The culprit is supposed to be paper, as in paper metals. In simplest terms, one sells the precious metals short and waits for such orders to ripple through the entire market. Only the big Wall Street firms have the muscle to do this on a grand scale, we're told, and that's where fingers inevitably point.
This Bloomberg article like most articles in the mainstream won't hear of any conspiracy talk. There are plenty of reasons for gold to be a wretched investment these days and the article – like so many Bloomberg articles – enumerates a number of them.
It's not surprising, of course. Bloomberg's major profit center seems to be a trading terminal that provides a gamut of bond prices and a number of other graphics and news items. Michael Bloomberg started his news division to provide more information to his terminals.
When it comes to Bloomberg media, the terminals and other businesses are truly the tail that wags the proverbial dog. Bloomberg is closely tied to Wall Street and Wall Street is no fan of gold, which simply can't provide the kind of financial elasticity that fiat money offers.
Gold now is down about 1.6 percent year-to-date and it wouldn't be a surprise if the precious metal fell more this month. "March has a history of being the worst" month for gold, according to Bloomberg. During the past four decades, on average, bullion futures decline 1 percent in March. "Prices fell 65 percent of the time, more than any other month."
The reasons gold prices can't seem to gain any traction are many: Job creation has been robust, inflation is low and the Federal Reserve is widely expected to begin the process of easing back on monetary accommodation — strengthening the dollar and further reducing gold's appeal.
As we noted late last year, the gold narrative has failed. The promised hyperinflation that was supposed to send gold soaring never arrived. Instead, we had disinflation, with a threat of global deflation.
We can see the meme building here. Gold is not doing well because job creation is robust and inflation is low. Also, the Fed is about to raise rates – or so we are told.
Let's unpack this. The head of Gallup recently called US employment numbers a fiction – so how does Bloomberg make the case that employment is robust. Maybe this statement includes Europe, but Europe is engaged in central bank quantitative easing because the "recovery" there remains weak to nonexistent. Japan seems little better.
How about inflation? We know monetary inflation isn't low because there are estimates that central banks around the world have printed some US$50 trillion in the past six years in an effort to generate asset inflation. Perhaps it is price inflation that has remained subdued – but not according to outfits like ShadowStats that put the inflation rate considerably higher than government figures.
What we end up with are the same questions these sorts of articles always generate. In India, the black market for gold smuggling is huge – tons and tons of yellow metal. Gold seems to be a sought after commodity in China, too, where consumers line up around the block to buy it. Much of the world, then, seeks gold and yearns to hold it. Yet the formal "prices" remain on a downward slope.
The stories themselves don't make sense. There's lots of demand for gold; price inflation is active and Western economies remain lousy. If gold is sold as a "safe-haven" then business should be booming.
The article goes on to make other points regarding gold's lack of traction. The Swiss National Bank ballot ("requiring the Swiss National Bank to hold at least 20 percent of its 520 billion franc balance sheet in gold") didn't pass.
India was "going to cut its import duty on gold," but that didn't happen, either. Finally, we are told, the new Apple watch would consume so much gold that prices would have to rise.
The article finishes by explaining that the most pernicious influence on gold is the rising dollar. "Against a basket of major currencies, the greenback is up more than 8 percent so far in 2015, after rising more than 12 percent in 2014."
Gold is in a declining cycle, the article informs us, while stocks are in an ascending one. "If the economic trends of the past few years persist, they favor stocks over gold."
We've come to a similar conclusion but not for the reasons given. For us, there is an evident and obvious manipulation taking place – and that's central bank money printing. The vast sums of money being printed by central banks in the past half-decade have ballooned the stock market and high-end goods.
Is this "natural?" Is this a way a marketplace would work absent monopoly money printing abetted by the force of the state?
On its face, various asset classes are obviously manipulated, especially equity. The business cycle itself is manipulated. Gold may be giving off signals having to do with a rotating of the business cycle but … c'mon, really?
The staggering sums that have poured into the market have likely frozen the business cycle in place. It's still a "golden bull," though one that hasn't had any opportunity to find closure. There's never been any blow off, not as in the 1970s.
Many arguments involving gold and stocks seem to be paper constructs, rhetorical fantasies. The reality is certainly not what is being maintained, even thought valuations are real enough.
We've suggested that the world has embarked on a Wall Street Party swelling into a financial fiesta for securities marts. We don't know how long this is going to last but tremendous profits have probably already been taken in this market.
Likewise when it comes to gold, the reasons why the yellow metal has underperformed don't seem especially convincing. But nonetheless, gold is where it is … the stock market, too.
Is gold a bad investment? Not historically. Is the stock market over-inflated? Yes, if you believe that central bank money printing inflates assets.
Most people won't see it that way, of course, because the modern narrative wants to focus people on extraneous reasons for various asset-class movements. For us, the primary market mover remains monopoly money printing. Focus on that and things become clearer.
Can central bankers and others around them continue to keep the proverbial balls in the air? Are you betting on the system's continuation or its collapse? Timing is everything.