Sunday, June 5, 2011

BMO on Gold: "The only gold bubble likely to burst is the bubbling ridicule of gold"

In another sign of the changing attitudes on Gold comes this treatsie from BMO Capital Markets

As this blog repeats over and over, the story of this coming decade will be all about sovereign debt and it is sovereign debt that leads Don Coxe of BMO Capital Markets to make this clear cut declaration about Gold:

  • There is a new torrent of warnings of a "gold bubble."
  • We have been hearing that story from concerned clients, partly in response to George Soros's highly-publicized liquidation of his holdings of the gold ETF: GLD.
  • Another factor has been the debate about Barrick's move into copper, which is being partially financed by a large bond issue. Despite Peter Munk's passionate and articulate defense of that strategy at Barrick's annual meeting, many observers seem to wonder whether this is a warning sign from the long-standing pre-eminent gold miner that gold's future is problematic.
  • The financial press has been including many sneering observations that gold is a useless speculation on infl ation that is unlikely to occur. Why own an inflation hedge that pays no income?
  • We dissent from that tiresome scorn: those trained in Keynesian economics about the "barbarous relic" never bother to reflect that Keynes expressed almost childlike faith that central banks, acting pursuant to the Bretton Woods agreement of which he was a major architect, would always exercise restraint in monetary policies that would make gold passé.
  • The Seventies proved him horribly, hopelessly wrong.
  • But the Eighties and Nineties made it look as if he would ultimately be proved right.
  • However, the history of major monetary policies since then—and particularly since 2007—makes the case for gold appears as cogent as it was in the Seventies. This time, there’s no chance the Fed will drive interest rates to double-digit levels to fi ght infl ation and protect the dollar. It may be that, after years of getting by on Financial Heroin, the economy lacks the energy and élan vital to survive even normal interest rates—let alone Volcker rates.
  • As for the most basic argument—that gold is not an investment, because it pays no income—that seeming tautology is, at root, inherently false.
  • Gold has always been an alternative currency. It is resuming that role as central banks switch from the sell to the buy side.
  • A unit of paper currency pays no income.
  • It can be exchanged for bonds, deposits or stocks that pay income, but a holder of a million euros or dollars in a safe deposit box earns no income on the hoard—just as a holder of a million dollars' worth of gold earns no interest.
  • The big difference is that the inherent value of the paper euros or dollars will fluctuate in response to the changes in those currencies' values against other forms of paper money, and all currencies must decline in purchasing power inexorably in response to longer-term infl ation. According to our favorite skeptic on Received Wisdom, Stephanie Pomboy of MacroMavens, the S&P's performance since 2000 defl ated by the gold price move in that time is a minus 82%, compared to the more reassuring nominal return.
  • Leading central banks now target infl ation at 2%, saying that anything less could lead to defl ation and Depression.
  • As Harry Truman, one of the most shrewdest and most candid of Presidents, observed in response to Keynesian demands that the US target an "acceptable" rate of infl ation that would do no harm, but would be economically stimulative.
  • "You can't. That's like being a little bit pregnant."
  • Gold's market value most certainly fluctuates. But so does the purchasing power of paper money. Its inherent value almost never rises, but its slow decline can seem almost imperceptible. However, if commodity-spawned inflation comes roaring back, paper money’s value will plummet.
  • With global money supplies growing at cancerous rates, this would not seem to be a propitious time for sneering Keynesians to dismiss gold's rise as "a bubble." How many of them warned that the Japanese bubble, or tech bubble, or housing bubble would burst with disastrous consequences?
  • Why do they argue that there will be no inflation from Fed and Bank of Japan policies—for which there are no precedents, and which make Seventies central bank policies look almost as tight-fisted as Paul Volcker?
  • Gold has—for millennia—been the one commodity that can always be used to buy other assets or goods and services.
  • It will always have that basic—and completely useful—function.
  • The only gold bubble likely to burst is the bubbling ridicule of gold.
And as faithful readers know, this follows BMO strident declarations about the future of Silver, as outlined here.
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1 comment:

  1. As the Champ would say; "Gold skeptics are Ultra Maroons". How they can ignore the trillions of dollars created for bailouts and the purchase of government debt, completely beggars the imagination. This simply can not be considered benign by anyone with half a brain cell. Are they protecting their own self interest or just plain stupid?