It was very interesting to hear a full presentation of the bearish case for gold by Paul Van Eeden, President of Cranberry Capital at the closing session of the Agora Financial Investment Symposium in Vancouver.
For his part it was both brave to face such a gold positive audience and tell them what they did not want to hear and also to stand up and say so in the same forum where he predicted the same thing three years ago only to be proven completely wrong (click here).
Different This Time?
But Mr. Van Eeden does have some credibility because his timing on the gold junior stocks was excellent and he closed his newsletter recommending them and sold everything before this market collapsed. So will he be right on gold this time?
His argument in a nutshell is that the fear of inflation has been wildly overdone. Yes the money supply has doubled in the past four years since the global financial crisis but this does not automatically cause retail price inflation. Indeed, where is it?
The money just sits on the books of the commercial banks and nobody wants to borrow it right now, so there is no inflation. However, this does keep the banks solvent at a time when otherwise their bad debts would bankrupt them.
Mr. Van Eeden’s point is that the global economy looks set to be fighting off a deflationary collapse over the next few years, not inflation and so the gold price has shot too high as a protection against a danger that does not exist.
China, he thinks is in far worse shape than anybody realizes. The US economy is clearly slowing down and Europe is a huge mess without a credible solution in sight. That is a deflationary world.
However, ArabianMoney would make a couple of very important points. First, deflation is going to be met by more money printing. Mr. Van Eeden saw no QE3 next week but it is surely just a matter of time. Then the ECB is promising to do “whatever it has to” and China is reckoned to have the most room for a policy response.
This is clearly a dynamic process. It is not standing still. Now if we look to Greece and Spain we can see where money printing will always end, and that is with a bond market crash. Eventually they overdo it and the bond holders don’t believe their money will ever return and by bidding up yields they ensure that is true.
True Safe Haven
Now where does the money go when bond markets collapse? Does it neatly rotate back into equities? That is not very likely because such a credit squeeze is a disaster for any country, just look at Spain and Greece.
No as bond markets teeter money will flow back into the traditional safe havens of gold and silver where there is no central bank as a counter party to devalue your money; and because there is a fixed supply of precious metals and a huge supply of money the price will go up
That is why the gold bears have got it completely wrong, though it is perfectly possible for them to right for a short period when all financial markets sell-off as happened in late 2008. Then gold fell by 25% but rebounded with a vengeance more than doubling in value.
In a true bond crash the gold price will multiply many fold, and if you accept that then gold prices really ought to be already much higher because the bear market is coming for bonds and not gold. Just look at the contagion in Europe, this cannot be contained.