More On Gold And The Global Economy

You asked me to review the article Why Gold Will Break All Records (http://www.egoli.com.au, weekly feature).

Overall the article has merit because it gives a balanced view between some of the fundamentals that may be underlying the bull market in gold and the speculative element (the emergence of ETFs).

From the point of view of a speculative investor, there are indeed strong fundamental arguments in favor of a long-term bull run in gold, but it remains a bet that could go either way.

From the point of view of an economist, the "gold is gold is gold" argument doesn't convince. Sometimes a piece of wood or a sheet of paper or a ceramic shard is worth more than gold, and sometimes other metals are worth more than gold.

Gold is as much a fiat measure of value as paper currencies or as electronic accounting systems: it is valuable because people view it as valuable; there is no "intrinsic" value in gold or in anything for that matter. And while it might be conceivable that the gold price would determine the allocation of resources for, say, big energy infrastructure investments around the world, it could be as, more, or less practicable in comparison to any other system – even war – depending on its design and its enforceability. In the case of war as the determinant of the allocation of investment in international energy infrastructure, I think there may be commodities other than gold which are more valuable. Nonetheless, they could still conceivably be priced in gold, but then the focus of the war effort may shift to seizing the sources of gold, not energy. I think the global human community is facing a different problem. Perhaps we should design our "monetary" system based on units of energy.

A few quibbles. The article states that "more and more imports have flooded into the US while fewer exports have left its shores": not true. The volume of US exports is at all time highs and the US is the number one exporting nation. The problem is that it is also the number one importing nation to the tune of an around 7% trade deficit measured against GDP.

Also, I reiterate a point on inflation. The flood of Chinese imports has kept inflation down in terms of incidental consumer goods, those which account for most of the official CPI, but US inflation of domestic assets and services, like housing, healthcare and education, has been sky-rocketing, and little effective has been done to address it; the current cycle of interest rate rises may arguably be timid and may prove to be like shaking a stick at a tidal wave: credit and prices of non-exportables are out of control, though of course this is to some extent related to international linkages.

Nonetheless, the competitiveness of US manufacturing, both in high-tech fields and possibly also in lower rungs of the technology chain once again in the future, as well as the overall productivity of the US economy, cannot be easily dismissed. On the other hand, however, these real and potential strengths may be nullified by some of the recent blunders in domestic economic policy (too easy credit for too long, for example, leading to the gross misallocation of resources, both human and material, flooding out real, productive investment domestically, not to mention the social implications of a debt-burdened, fast-declining middle class) and domestic and international energy policy, in no small way contributing to the current global political tensions and the depletion of country's fiscal reserves, among other things.

In short, the US economy is operating on an unsustainable consumption and energy model, a significant contributor to the several imbalances in the global economy and the tension in the global political community. One offshoot of this situation may be a speculative bull run in gold prices as fiat currency systems lose their credibility as instruments for determining the peaceable allocation of resources around the globe. The speculator will focus on the former, the economist, perhaps, on the latter.