Another gold liquidation

Yesterday saw a large sell off in gold and silver. Reasons for the fall were abound including rising inflation, increasing yields and the Russian vaccine approval. All of them valid reasons why gold and silver would fall after sitting in overbought territory for so long. But what has changed?

The reason I hold gold is the destruction of currencies through extraordinary monetary expansion and fiscal profligacy. Not any virus pandemic. Those reasons remain.

Inflation does not destroy the value of gold any more of less than it does of any other asset. The long term value of gold is determined by the opportunity cost which is the yield earned on other assets. Whilst yields on the 10y rose yesterday, they hardly reversed the falls of recent months (and indeed years), see below.

Grey indicates recession period.

Looking ahead with the pandemic now accepted to be having a material long term impact on the economy and a US election impending, government deficits are not likely to see anything near normal for some time; see below.

The Republicans are trying to get people back to work by reducing the incentive to stay at home. This means they will still give them money whilst unemployed but just not as much. So the debt still increases and people have less money to spend. It’s a compromise but not one that adds to productivity.

Even longer term, the US needs to control the yield curve just as Japan has done keeping the 10y around zero percent, just look how successful they’ve been. Of course it has not helped inflation targeting or growth.

This is likely the next step for monetary policy in the US. That means the US government can issue plenty of supply around the 10y with a willing buyer focusing on keeping rates pinned to zero.

Simply, there is a great need for government spending and politicians love to spend your money if they can find a reason. Central banks have dug themselves in so deep they are part of the problem; i.e. they will not admit failure if they don’t need to and hence they will continue on the same path. Unlike politicians who feel they can always talk themselves out of failure, central bankers play ‘pass the parcel’ to the next in line. There’s not long left in that party game, the wrapping is getting very thin.

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