Friday, January 21, 2011

Gold: Barometer of Hysteria

Gold is losing a bit of it´s glamour in the financial markets. Right so, there is no fundamental reason behind the gold rally.

 “All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth", said Friedrich Nietzsche. This fits to gold speculation. The yellow metal doesn´t have much economic substance. Ok, a golden necklace on the skin of a girl, oh what a pleasure. But gold doesn`t have a place in the economic policies of today.

The rally of gold is just a kind of mass hysteria. The media reported two alleged reasons for the gold buying spree.

1. The expansive monetary policy worlwide creates inflation and gold is considered as a protection against inflation, the gold bugs tell us. Indeed, the reserve banks in the USA, Europe and Asia pumped a lot of money into the world financial system to restart the world economy. But, the Chinese government is already applying the brakes, rising interest rates and pumping liquidity down from the markets. And the reserve banks of the USA & Europe will follow soon, when they see that the economic rebound is sustainable. Therefore the inflation will not get out of control, as many gold bugs suggest.

Yes, energy and food prices are rising fast. But rising prices for products will animate their producers to produce more. They always did. Therefore the farmers will invest (planting) more and expand their harvests, pressing on the prices again. And the oil producers have more initiative to find more of the expensive commodity in the ground, as the example of Brazil shows, with the discovery of a lot of new resources offshore lately.

2. The other reason for the gold rally was the "crises", the media explained. Yes, we had a crisis at the end of 2008. But now the world economy is healing. And, gold is no protection against a depression. When people lose jobs & income, they have less money to buy commodities, like gold. Commodity prices must go down, even the price for jewelry. Buying gold, any time when the media transmitted negative news, was just a sign of hysteria.

The weakening gold price shows now, that the hysteria is cooling. It seems, the markets are gaining more rationality.

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