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Minyan Mailbag: The Bull Gold Thesis

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...the case against the USD is not nearly as one sided as consensus believes...

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Professors,

One thing has been troubling/puzzling me about the bull gold thesis.

If there is a reduction of global money supply then there is less money available for each asset class. Do you think gold will attract a disproportionately larger amount due to lack of confidence in the dollar? Do you think gold (metals) is going to go up due to a global confidence crisis in the fiat system?

Basically, why would metals go up in a deflationary environment?

Thanks,
Minyan Joe

MJ,

To the degree that there is a global reduction in money supply (read: credit) then it will FIRST come from a decrease in time preferences by consumers and corporations (less demand for credit), THEN will be exacerbated by the various central banks around the world who will curtail supply (they simply follow the trend, they manifestly do not establish it). And indeed if there is this credit contraction then all the assets and business activities that were raised up and levitated artificially on the back of that credit (that risk-seeking time preference increase) will be, as night follows day, hurt by the reversal of that trend – by the removal of that liquidity from the system.

The subsequent action in the dollar is more difficult to parse but a rise in the value of the USD against other currencies would be at least consistent with a deflationary credit contraction in which global players became risk averting and perceived safety and liquidity became primary motivators (read: short term treasuries which, in order to purchase one must purchase the USD first). Make no mistake, EVERY central bank has inflated (think prisoner's dilemma) and though they don't have the obvious structural imbalances that the US has, they certainly have macroeconomic structural problems of their own: the PBOC has increased their own balance sheet assets (a proxy for their monetary pumping) by 34% annually in the last quarter. And of course, we are aware of the non performing loans within the Chinese system (which Fitch, Pricewaterhouse, and Ernst & Young recently noted) which are a manifestation of the same type of macroeconomic imbalances that so plague the much hated USD. All-in-all, the case against the USD is not nearly as one sided as consensus believes and within a serious credit contraction, one can easily make the case for a stronger USD over some non-trivial period of time.

Hope that helps…

-Scott
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