Monday, June 15, 2009

Investors buy gold, as fears of inflation rise

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The Daily Bell; issue 318

Private investors are buying gold in an attempt to protect themselves against a rise in inflation, trade figures indicate. Figures from gold brokers suggest that small investors are buying up physical gold, such as bars and coins, as well as so-called "paper gold", such as shares in gold companies and gold funds in far greater quantities than a year ago. Gold Money is a company that allows investors to buy gold bars or stakes in the bars, which it then stores in vaults on clients' behalf. A year ago it held $352 million worth of customers' gold in its vaults. This has nearly doubled to $694 million by the end of May. - UK Telegraph

Dominant Social Theme: Investors - a fearful lot!

Free-Market Analysis: These articles always seem to contain some measure of astonishment and exasperation, as if it makes no sense to buy precious metals when there is so much paper money available. However, the worry over price inflation is a real one. It may not be realized this year, or next, but it will likely be realized, at least in part. And an awful lot of paper money will have to be drained very quickly from the West's linked economies to avoid it.

As we pointed out in the other article in today's Bell, the ability of central banks to drain money from the system is not in question. But the timing certainly is. While central banking is presented as a science, it is not. Central bankers used to like to boast that they could calculate from national and international money flows whether there was too much or too little money in the system. But this boast eventually proved hollow. There are too many ways to manufacture money nowadays, and there is no accounting for all of it, and thus no way of knowing how much is too much, and when that critical point is reached.

As Federal Reserve Chairman, Alan Greenspan, when he was younger and more optimistic, launched a little noted search for the indices that would let him know how much money to print and when. He gave interviews on the subject - often agonizing ones in which he sounded a bit like King Lear or maybe Hamlet - and finally seemed to conclude that metals themselves were the best indicator. The only trouble with using precious metals as an indicator of price inflation is that they, like every other indicator, must lag. Instead of providing a vision of what lies ahead, they are only signaling what has already occurred. (In an interview on this subject as we recall, Greenspan eventually admitted this, too.)

This is the dilemma of the central banker. Having removed the market from the production of money, it is incumbent on the individuals involved to substitute their own judgments for the invisible hand. Having poured money into their various economies, central bankers like Ben Bernanke will now have to determine when to "sterilize" the excess funds. The only trouble is that they have no indicators, except lagging ones, that will inform them of when they need to do so.

If Western economies do rev up, assuming markets continue to rise, then central bankers will have to decide when to raise rates and take other actions to reduce the money supply. The idea that these individuals can get it right when there is no available methodology is certainly questionable in the extreme. The bankers likely will react too soon or too late.

Conclusion: Those who believe that the central banks can scientifically stimulate economies and then efficiently drain them of excess cash in a timely manner are welcome to keep the faith. But we remember that Ben Bernanke et. al. had no clue of what was about to crash down on their heads in 2008. None of their indexes and economic measures seemed to show them that the global economy was about to seize up. Yet these same bankers - and the mainstream media folks who clustered in admiration around them - now assure us that, having further stimulated economies, they are positioned to determined accurately when they need to begin a reduction. This is the scenario that the Western public is being asked to believe in, one that demands pinpoint accuracy. Some will grant its probability, or possibility. Others will simply buy gold.

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