Fear Doesn’t Glitter

“All money is a matter of belief.”
– Adam Smith

Gold is taking a solid beating these days. It’s been slipping for a while, but when China revealed that it’s reserves were less than believed it really fell – quickly slipping below $1,100 per ounce when one mysterious trader dumped everything. It’s now more than a third off its 2010 peak and nearly everyone believes that it’s doomed to slip below $1,000 per ounce by the end of the year.

What happened? Isn’t gold the ultimate money in an unstable world? The short answer is no, and this has as much to do with the rise of the US Dollar as anything. But in the end gold is not as much a form of money as it is a barometer of fear – a commodity that appears to be in much shorter supply today than it was just a few years ago.

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Ready to Panic?

What does it take for international markets to panic?  With the debt ceiling due to be hit in a little more than a week, the short answer is that the “full faith and credit of the United States” is still worth quite a lot.   We’re only starting to see the first signs of a panic as an auction of 1-month TBills sold at a net rate of 0.355%.  If that doesn’t impress you, it’s worth noting that it was one third that a week ago.

Stocks started falling, too, with the DJIA losing just over a percent.

Allright, it’s not much.  Gold isn’t budging above $1330 or so per ounce and benchmark 10yr TBills are still comfy at 2.64%.  These are probably the best standards to watch for signs of panic as the stalemate goes nowhere.

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Gold Down for the Long Run?

“The long run is a misleading guide to current affairs.  In the long run we are all dead.”
– John Maynard Keynes

A step back can be very illuminating, especially in economics.  History teaches us an awful lot when we are willing to pay attention to what it says to us (which is almost never).  The long run is also a good way to get away from current fashions, trends, and all the ways that everyone can fool themselves.  Of course, as Keynes tells us, you run the risk of making a completely different mistake in the process.  At least no two economists ever agree on anything, so there’s plenty of wiggle room.

It’s the bigger version of your typical financial reporting – “Stocks fell today on news that blah blah blah …”  when in fact it was just a drippy grey April day in New York and everyone felt lousy.

A decade-plus trend, the increasing price of gold, is coming to a spectacular end.  This may mean something very important – if it’s not the last gasp of the last bubble to work its way through our system.

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