Will Gold Go Through a Bust in Isolation or Alongside Other Asset Classes?

By Charles Price  SEP 08, 2011 10:45 AM

The one difference between gold and the bubbles in other instruments is that gold has a monetary role, uniquely.


I was reading Todd Harrison's article, Is the Gold Bubble About to Pop? in the context of the Swiss National Bank action to see what the implications were or might be for the other safe havens, and I suspect that with Harrison's knack for getting so close to turns, he'll probably be right again.

First of all, on what the Swiss franc's done so far, the comparative moves for gold would be to around $1525-$1550 and 10-year bond yield curve 3%, using 1-year daily data. This move in gold has also taken it to the long-term comparative equivalent of 1,500 on the SPX (and $50 silver) in addition to the other comparative tops of the chart in Harrison's post, all a recipe for ongoing turbulence, etc. Even though part of the rise to catch up with that SPX level is justified in perhaps implicitly recognizing the sheer quantity of actual and implicit monetization and support involved in getting the equity index to that level over the last 25 years or so, let alone keeping it there.

The question I've been asking myself all the way up is whether gold will go through a bust in isolation or whether it'll be in concert with other asset classes as it was in 2008. While definitely not saying "it's different this time," the one difference between gold and the bubbles in the other instruments Harrison showed in his chart is that gold has a monetary role, uniquely. And not just "traditionally," in the Ben Bernanke phrase. And I've seen it remarked in various contexts that gold is a bet against central banks which I'm inclined not to agree with, although I definitely understand the sentiment that perceives it as such. In the first half of the 1980s there was a pretty loose line of central banking thought that gold was a barometer of monetary policy, and that around $500 an ounce indicated a neutral-ish policy stance, sub-$500 was tight-ish territory, and over $500 was loose. So if you adopt that line, it can add one sense of perspective to today's global financial systemic crisis. But if one thinks of gold as the converse bet on the same side as central banks it could also be saying that central banks are still in the fight against collapse, as well as it possibly giving some sort of an indication of the extent of what monetization has to be done to succeed in staving off systemic collapse -- both through monetization as well as balance sheet revaluation. The other consideration is that everything is a bubble (except cash, like late 2006-early 2007) within a hopelessly distorted and overburdened system, and not forgetting that the OECD isn't viable at current levels of raw material price inputs, even with supposedly zero rates. And maybe a fair amount of the developing economies too, with the former not functioning "normally."

So in thinking of it more in that sense, if gold were to collapse, my own expectation would be that it's a signal that central banks have lost and that other asset classes could or should fall even more than gold. This would then be the basis for holding gold equities, as well as the purchasing power of the bullion rising proportionately, or maybe even disproportionately. So less to do with "insurance," all to do with monetary from my own selfish perspective, and therefore the entire question for gold reverting back to the extent of the systemic insolvency. This is the third one I've had direct experience with and involvement in, but is also the only one that has been total, rather than the earlier ones which were only partial.

When the debt logjam starts to break, we should get some more clues, I hope, depending how it's dealt with. And if governments begin to show signs of becoming less dishonest and more open, visible, and transparent with no more interventions (the German Constitutional Court decision is just the latest instance of the rule of law being obviated), that should help and possibly be not so good for gold. And if Ben Bernanke ever realizes that the Fed's monetary policy is actually tightening conditions rather than loosening them. But in this environment where nobody really knows what anything's worth, it's anyone's guess, so I suppose the question then becomes what to do in the event of a collapse in gold prices -- and that'll obviously depend on what the systemic picture looks like then. Can they really fix it supposedly painlessly and seamlessly? I think not -- not on the way it still looks to me today.
Positions gold and silver bullion and shares

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