If the economy is recovering, why is gold still rallying?(Read article summary)
Gold is what investors buy when they suspect that financial policymakers are making mistakes. If we're on the road to recovery, why do they continue to buy gold?
Gold Rallies Against the Sovereign Debt Crisis
What a great town! Buenos Aires. We love it here.
Because it shows how you can completely foul up a major economyâŚand still enjoy a great steak dinner with a good bottle of wine.
Not only that, the weather is nice and the women are pretty. Who cares about GDP, debt, monetary policy and good governance?
Argentina is probably the best place in the world from which to contemplate the worldâs financial future. Huge errors now being made by the US and most other governments are bound to lead to huge trouble. In other words, theyâre bound to lead to the pampas, where the gauchos have been there, and seen thatâŚmore than once!
On Friday, US stocks rose. The Dow went up 70 points. Gold rose too â up 9 dollars. It looks to us as though the bull market in gold has resumed. The yellow metal could soon scale the $1,200 markâŚand challenge its all-time high.
Why is gold moving up? Gold is usually what you buy when you suspect that financial policymakers are making mistakes. But what mistake are they making? The ârecoveryâ is a huge success; everybody says so. On Monday, the papers reported Larry Summersâ remark; he said the recovery had reached âescape velocity.â And on Thursday Ben Bernanke congratulated himself publicly for having saved the world from a deep, dark depression. The central bankers and finance ministers know what they are doing, donât they?
Apparently, gold doesnât think so.
And last week, the Bank of International Settlements agreed.
âThe Bank for International Settlements does not mince words,â says a report in The Telegraph. âSovereign debt is already starting to cross the danger threshold in the United States, Japan, Britain, and most of Western Europe, threatening to set off a bond crisisâŚâ
The problem is coming to the âboiling point,â said the report.
The risk is an âabrupt rise in government bond yieldsâ as investors choke on a surfeit of public debt. âBond traders are notoriously short-sighted, assuming they can get out before the storm hits: their time horizons are days or weeks, not years or decade. We take a longer and less benign view of current developments,â said the study, entitled âThe Future of Public Debtâ, by the bankâs chief economist Stephen Cecchetti.
âThe question is when markets will start putting pressure on governments, not if. When will investors start demanding a much higher compensation for holding increasingly large amounts of public debt? In some countries, unstable debt dynamics â in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels â are already clearly on the horizon.â
The BIS, in charge of monitoring global capital flows, said public debt has risen by 20pc to 30pc of GDP across the advanced economies over the last three years. Semi-permanent structural deficits have taken root. âCurrent fiscal policy is unsustainable in every country (in its study). Drastic improvements in the structural primary balance will be necessary to prevent debt ratios from exploding.â
Historical data shows that once public debts near 100pc of GDP they act as a ball and chain on wealth creation.
If countries do not retrench quickly, they will create a market fear of âmonetizationâ that becomes self-fulfilling. âMonetary policy may ultimately become impotent to control inflation, regardless of the fighting credentials of the central bankâ, it said.
Some states may be tempted to carry out a creeping default by stoking inflation. âThe payoff to do this rises the bigger the debt, the longer its average maturity, the bigger the fraction held by foreigners.â The BIS said the danger that any government would consciously take this path is ânot insignificantâ in the longer run.
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