By Michael J. Kosares
Friday, 8 March 2013
“As 2013 begins, the downside risks to the global economy are gathering force.” – Noriel Roubini
“Madness is rare in individuals – but in groups, parties, nations, and ages it is the rule.” – Friedrich Nietzsche
There is a kind of madness in the air, and not the harmless sort that inhabits the annual college basketball fest. Europe is closer to dissolution than tighter union. The United States has consigned itself to a self-imposed paralysis that originates in the nation’s politics and terminates in its economics. In Asia, nation states have declared war — over currency values — an economic war that threatens to become a hot war and drag the United States into it. The Middle East, given last year’s street riots, dreads the coming of a new Arab spring and what it might bring. The universal response from Berlin to Tokyo is to run deficits and print more paper money to cover them. Investors, inclined to believe none of this would resolve itself soon, responded by taking matters into their own hands. The U.S. Mint, a bell whether for international demand, reported record sales of American Silver Eagle sales in January, and the strongest month in two and a half years for the American Eagle gold bullion coins. The Mint reported continued strong demand for its bullion products in February — up a robust 283% from February of last year.
Please note (below) the eye-catching spike in the monetary base since the end of 2012 — a nearly 8% gain. We will be monitoring the data to see if this is a short-term move or something more permanent like the vertical trajectories of 2009 and 2011. Gold, as the chart illustrates, closely tracks but lags the monetary base. If nothing else, the extensive and on-going creation of money (whether or not it translates to double-digit price inflation) suggests that the Federal Reserve remains in crisis mode and that there might be volcanic risks in the banking and credit system rumbling just below the surface. Maybe the Fed knows something the rest of us do not — something much more dangerous than the stubborn 8% unemployment rate. Economist Noriel Roubini (quoted above), who predicted the meltdown in 2008, warns of something worse in 2013.
Thus far all of the money created seems to have vanished into some unfathomable black hole. Disinflation/stagflation have persisted despite Ben Bernanke’s yeoman effort to instigate the opposite. The cause and effect relationship between gold and the monetary base persists nevertheless, a direct result of gold being perceived as the ultimate store of value for all seasons. In other words, gold and the Federal Reserve are both reacting to the same stimuli, i.e., the presence of systemic risk. Gold’s bull market has been fueled at its core by global physical demand from those who see coins and bullion as a refuge from those risks. It has proven to be just about the best disinflation/stagflation hedge available — thus proving a utility that goes beyond its long-standing reputation as simply an inflation hedge. Should a virulent inflation suddenly appear, and that remains a possibility, gold likely will still follow the monetary base but for more established reasons.
Gold, in my view, has not reacted as yet to the roughly 35% expansion of the monetary base in late 2010-early 2011. Keeping the lag in mind, that reaction seems overdue. If gold were to react as it did to the 2009 surge in the monetary base, much higher prices could be in the offing over the next few years. Just as the credit crisis of 2008-2009 pre-dated gold’s push to new all-time highs, a similar event, like the one Roubini forecasts for 2013, could serve as the launch pad for next leg in the bull market.
Noriel Roubini interview – Crisis in 2013 would be worse than 2008