Bullion – The Trouble Barometer

Last week Jack Welch sparked off a debate regarding the measurement of government statistics, it was the release of the US’ nonfarm payroll data which got him, and some others, more than a little annoyed.

The issue of how to calculate vital government statistics has become a growing sticking point in recent years, and not just in the US. In the UK, the measure of inflation is increasingly suspect, particularly as the calculation of RPI is about to be changed, while in the US the official inflation rate is way off the “real” inflation rate. It’s not just economic data which is affected by political targets, the UK measure of child poverty was badly manipulated by the Labour government in order to appear as if they had met one of their campaign promises.

These issues, why they happen and how they can be resolved is definitely an article for another time however it is becoming increasingly clear to a growing number of people that those who govern do not carry the same interests of those who are governed.

The Golden Barometer

During times such as these we should place our faith in something which has historically transcended government statistics as well as political goals and semantics. For this reason many are turning to gold as their trustworthy protector from government efforts to misreport statistics affecting our daily lives by their dangerous policy making and financial stresses.

Many will struggle to understand how we can trust the gold price when it has shown volatility since the 1970s and is deemed by many to be in a “bubble.” A new paper by Erb and Harvey shows the real price of gold is now at a historical high across all 23 countries studied. They find that while the nominal price of gold has been volatile it has shown a strong trend since the 1970s, however the inflation-adjusted price of gold is volatile without a trend.

They have not just looked at countries which are deemed to be “unsafe” or financially volatile, countries such as Denmark, New Zealand and Switzerland are covered and are also found to be experiencing historically high real gold prices.

The authors state “If the real price of gold is a barometer of perceived troubles then there is trouble everywhere. Or alternatively, gold is expensive everywhere.” They go on to ask “is the high real price of gold a barometer of the ability of investors to ‘see though’ inaccurate official inflation reports? Or is the high real price of gold a barometer of irrational pessimism?”

With only 23 countries studied, it is irrational to argue that this is an indication that gold is what everyone is rushing into as they panic about the state of the global economy. But, it is a good place to start.

Why the Rise in the Gold Price?

Gold has always been desired in terms of jewelry and adornments, it has always been precious. So we cannot argue that it is “just expensive.”

“Irrational pessimism” is something which many commentators blame the increase in the gold price on. This is partly understandable when you see markets still rushing into currencies whose governments are no longer bothered about pleasing the currency markets.

We now live in a world where countries are no longer proud to have strong currencies. A strong sovereign currency was something which once upon a time was something which countries and their governments aimed for.

However, stable and strong is no longer something which is seen as particularly desirable. Now countries want weaker currencies in order to try and maintain or increase exports, and in light of the financial crisis try and keep it weak in order to prevent deflation at home.

Markets no longer seem to be punishing countries for their potentially fatal policies. Instead, market perceptions in regard to currencies are the ability and ease of which a government demonstrates its ability to maintain an elastic money supply and printing money.

Irrational pessimism would suggest that there is no possibility governments are suddenly going to come to their senses and realize that they are facing a problem which can’t be fixed through loose monetary policies. Whilst it may seem to most of us that the impact of these policies are under-appreciated and enormous, it seems that some, in at least 23 countries, are learning that this crisis may well be something which can’t be fixed by contemporary government thinking and it will affect everyone.

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