Find below a Bloomberg video in which an analyst of some sort claims gold could go to $6,000. Regular readers will know that I have been a long term believer in the gold bull market (indeed, MB itself is to some extent the result of my gold investment) but I take such predictions with a grain of salt.
The analyst’s rationale is that before too long the only buyers left of government bonds will be central banks. Such is an obvious increase in the monetary base and so gold is a way to protect purchasing power, the story goes.
Certainly, I share the view that more QE will be required and I won’t say that such a wholesale capitulation in bonds couldn’t happen as the complete reversal of today’s darling investment, but what I will say is that Bernanke and co, which are the ones that matter if you’re discussing gold, are aware of this danger. Hedge fund manager Ray Dalio recently described the US efforts to escape their debt trap as a “beautiful deleveraging” and here is what he meant. From Barrons:
Deleveragings occur in a mechanical way that is important to understand. There are three ways to deleverage. We hear a lot about austerity. In other words, pull in your belt, spend less, and reduce debt. But austerity causes less spending and, because when you spend less, somebody earns less, it causes the contraction to feed on itself. Austerity causes more problems. It is deflationary and it is negative for growth.
Restructuring the debt means creditors get paid less or get paid over a longer time frame or at a lower interest rate; somehow a contract is broken in a way that reduces debt. But debt restructurings also are deflationary and negative for growth. One man’s debts are another man’s assets, and when debts are written down to relieve the debtor of the burden, it has a negative effect on wealth. That causes credit to decline.
Printing money typically happens when interest rates are close to zero, because you can’t lower interest rates any more. Central banks create money, essentially, and buy the assets that put money in the system for a quantitative easing or debt monetization. Unlike the first two options, this is an inflationary action and stimulative to the economy.
…A beautiful deleveraging balances the three options. In other words, there is a certain amount of austerity, there is a certain amount of debt restructuring, and there is a certain amount of printing of money. When done in the right mix, it isn’t dramatic. It doesn’t produce too much deflation or too much depression. There is slow growth, but it is positive slow growth. At the same time, ratios of debt-to-incomes go down. That’s a beautiful deleveraging.
The evidence of the past few years endorses this position. So, it would take a mistake, entirely possible given nutters like the Tea Party, to push the US off this managed deleveraging track. But so long as it is on it, gold is going to rally from time to time, and remain in a bull market, but not enter the kind of blowoff described above.
The key to the gold price is instability in US monetary and fiscal policy and so far Bernanke and Co are doing a pretty good job. Good enough that the extremes of inflation and deflation have been avoided.
