Thursday, December 08, 2005

The gilded age

I do not have the tools nor experience to examine gold's stratospheric rise, but better bloggers do.

The Cunning Realist:
The Federal Reserve can remove liquidity from the financial system, which would take the steam out of both gold and oil. That's not an attractive option for the Fed or the White House since it would also dampen the stock market, which in turn would restrict our ability to pay for this war, impair Bush's ability to rebound in the polls, and disappoint the business community (and yes, I'm operating on the manifestly obvious fact that at this point the Fed has completely surrendered the political independence it is supposed to have). Or the Fed can continue to monetize each and every bump in the economy and the stock market, in which case gold will likely head towards $750 and oil for $80 with a concurrent and possibly precipitous rise in geopolitical tensions. That's the essence of the box the Federal Reserve has built for itself, and for us. In its role as sentinel, gold is indicating that the Fed has already chosen its course of action.
And Daniel Drezner:
I'm more concerned about the fact that "investors have put money into a wide range of metals." This could be because China's growing demand for raw materials has driven up the price of all commodities. But it could also be because risk-averse investors have figured out that they can buy something besides gold as a hedge against high inflation and political instability.

I strongly suspect that Chinese economic growth is the primary driver, because U.S. inflation right now is much lower than it was in 1980. On the other hand, a lot more foreigners hold dollars than they did in 1980, and the difficulty of predicting when the dollar will start to fall has me wondering if something else is going on.


Post a Comment

<< Home