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Why
Have Gold and Silver Fallen?
by Gary North
On August 11, the price of
gold collapsed: down over $35. So did the price of silver, platinum, and
palladium. A lot of people are asking why.
On my site's page on gold's daily
price, I make available a five-day chart of gold's price. On that page, you
will find my commentary on gold. Beginning on the 18th of March, and posted on
the 19th, I wrote that I believed gold had probably entered a bear market. That
call looked as though it was way too premature, since gold's intra-day high had
been $1,037 on March 17. In the very early morning of March 17, I ran an article
on my site on how to short gold to protect your position in coins.
Here is what I posted on my
gold price page. If you have visited my page, you should recall this.
I think gold has
entered a bear market. I posted this article on March 19,
2008:
The offsetting factor is
fear of war with Iran. See my Department: War With
Iran.
Just for the historical
record, here is what I wrote on March 18 and published on March 19.
Gold could fall.
I expect it to fall. So, you may pay a price for owning gold coins. I expect
to.
If you are not willing to
pay the price, you should sell all or part of them, or short gold bullion to
compensate you for the loss. In short, count the cost. This is a universal
rule (Luke 14:28�30).
I think the precious
metals are a bubble market today. It is ending. Here is a crucial sign that it
is ending. India is not buying. When Indians stop buying gold, they must be
replaced by new buyers. Who might they be? . . .
One day's move should not
be regarded as a definitive turning point � not after a seven-year run. But
there are signs that the run is over for now. It is time to think about
recession and even price deflation. As I have said for months, the FED is
deflating. We should expect prices to follow.
Silver and platinum also
fell on March 18. They are moving together in lock-step, up and down, yet the
economic fundamentals for the three are completely different. So, something is
driving them that cuts across individual markets. But what? I think it is the
last of Greenspan's bubbles: the commodity bubble. I think the bubble is about
to end.
But what about oil? Yes,
even oil. But the rate of declining price will be less than with other
industrial commodities. I think this will also be true of gold.
I believe in the Austrian
School's theory of money, including the business cycle. I have written a short
book on this. I am not so committed to a position proclaiming the ever-rising
price of gold that I am willing to abandon Mises' theory of the boom-bust
cycle in order to hold such a position.
Gold is ideal for Mises'
inflationary crack-up boom, although not as good as a home with a garden in
the country and a few thousand gallons of diesel. This is not the crack-up
boom. There has to be monetary inflation for a crack-up boom to occur. Today,
there isn't any.
If you wonder how I came to
this conclusion, read my mini-book, Mises on Money.
I was convinced on March 18
that the recession caused by the Federal Reserve's relatively tight money policy
would lead to a fall in the price of all commodities, especially the precious
metals. I believed that the commodity market was the last of the bubble markets.
The real estate market popped in 2006, and had continued downward. I was
convinced that the last market of Greenspan's bubble economy was the commodities
market.
Investors go from market to
market, trying to find the next market that is going to boom. This chase proves
to be futile. They chase bubble markets; they get killed by bubble markets. I
was convinced that commodities were going to fall, and that this was the end of
the road for the bubble markets.
In July, the commodities
market did begin to fall. I think this publicly marked the end of the commodity
bubble. One thing could bring it back: war with Iran. That would be disastrous
internationally, and it will push the price of oil and the precious metals much
higher. It was the threat of war with Iran that kept gold above $900 � not
monetary policy, not the fundamentals of the market, not technical indicators,
and not any of the other meaningless statistical indicators that are used by
defenders of a bubble market to persuade investors that the market is anything
except a bubble market.
You will no doubt see lots
of reports on this or that indicator that shows that the correction in gold and
silver and platinum and palladium and copper and zinc and all the other metals
is temporary. I don't think it is temporary.
I still worry about war in
Iran. I don't think people should ever discount too heavily the idiocy of
governments regarding war. The absolute stupidity of the President of Georgia in
launching a military invasion of the Russian-dominated province of South Ossetia
last Friday is indicative of what rulers do without counting the cost of their
actions. This is normal. So, while the fall in prices of oil and the precious
metals has given me some confidence that neither United States nor the State of
Israel will launch a pre-emptory strike against Iran in the near future, I am
certainly not willing to bet all of my money, including gold, on this
assumption.
Nevertheless, I have been
public in my warning since the middle of March that I believed that the bull
market in gold and silver has ended. If we are talking economic fundamentals,
gold and silver have had their big run. From now on and for months ahead, the
pressure will be downward.
RECESSIONS AND GOLD
Why is this the case?
Because the recession is real. If the rest of the world moves into recession, as
I think is likely, the demand for commodities will fall. The value of
commodities has nothing to do with value in themselves. They are valuable only
because the consumer goods that commodities are used to produce are expected to
rise in price. Manufacturers believe that there will be increasing future demand
by consumers for these goods. Therefore, they enter the market for raw
commodities, land, and labor, and they bid against each other in an attempt to
secure ownership of these producer goods.
Some people speak of the
intrinsic value of gold. Whenever you hear anyone say this, you can know for
sure that you are dealing with someone who knows nothing about economic theory.
There is no such thing as intrinsic value. There is only imputed value. There
can be historic value, but this historic value is based on long periods of time
in which people have imputed value to a particular good or service. There is no
intrinsic value, meaning a fixed market price, for any commodity. Commodities
are valuable only in so far as the output of commodities is valuable. This was a
fundamental insight of the founder of Austrian School economics, Carl Menger.
In a recession, consumer
demand falls. The goods and services that had been demanded before are perceived
as too expensive by consumers now facing a recession. They reallocate their
money to the most important uses in their household budgets. They buy the most
important goods and services, and they skip the purchase of marginal goods and
services. So, the tools of production that are used to produce the marginal
goods suffer a price decline. Demand for these producer goods falls.
Manufacturers look to the
future, and they conclude that consumers will be buying far fewer of the items
produced by the particular producer goods. Producers also look at the price of
commodities that are used to produce these goods, and they decide to purchase
fewer of these commodities. So, the price of commodities falls.
Gold and silver have been
sold as hedges against price inflation, and sellers also have told customers
that the Federal Reserve is dramatically increasing the money supply. For almost
two years, I have said that the Federal Reserve is not dramatically increasing
the money supply. It is barely increasing the money supply at all. This is why I
predicted there would be a recession. This is why I predicted that consumer
prices would not rise at anything like the increase in the supply of M3 and MZM.
I looked at the adjusted
monetary base, and I concluded that the Federal Reserve was only increasing the
monetary base by about 2% per annum. I looked at M1, and I concluded that the
money supply was barely climbing at all. This led me to predict that consumer
prices would slow down, and that commodity prices would fall as a result of a
shift in consumer spending.
I post links to these
statistics on my site's page, Federal Reserve
Charts. This is
why, on March 18, I decided that the bull run in gold and silver had ended. Only
war with Iran was likely to push gold back above $1,000 per ounce in 2008. I am
not optimistic that gold would go above $1000 in 2009, because I expect the real
estate market will continue its downward fall, and I think that will continue at
least in the 2010, and it may continue into 2011. Therefore, I think this
recession will be much longer than the average recession after World War II of
11 months. Gold does not do well in most recessions. Furthermore, neither does
silver.
I realize that you have
read a lot of reports from a lot of people that gold and silver were inevitably
heading higher. Well, they are not inevitably heading higher.
A CONSPIRACY?
If you read that there is a
conspiracy to force down the price of gold and silver, then you had better also
be provided with a clear explanation for why this conspiracy has forced down the
price of commodities across the board. It is not just gold and silver that have
fallen in price.
It is the entire Commodity
Research Bureau index. The CRB index is the standard index of commodities, and
it has been falling since the beginning of July. If conspirators are doing this,
they surely are very powerful and very rich conspirators. Writing in The
Daily Reckoning on August 8, Dan Denning
reproduced the CRB chart for the year. It is clear from this chart that the
collapse is across the boards.
This is no conspiracy. This
is Austrian School economic theory in action.
I think we are entering a
recession that will be known as the worst postwar recession since 1981. If
China's central bank slows down its 20% per annum increase in M1, as I expect
that it will after the Olympics, then we can expect this recession to be
international. If that is the case, then this recession could last longer, and
actually be worse, in the 1980�81 recession. It may not be worse in the United
States, but it will be worse worldwide. The United States has gotten rid of a
great deal of manufacturing employment since 1981. We are more of a
service-based economy. This means that we are less threatened by decreases in
consumer demand. Consumer demand usually focuses on decreased purchases of goods
rather than services. This is why recessions have such a negative effect on
commodity prices.
I think we are in only the
preliminary stages of a housing recession. Because we have not had falling
housing prices nationally since the Great Depression, it is legitimate to call
this a housing depression. This is not happening only in the United States. It
is taking place all over the world. It is especially taking place in
English-speaking nations. So, the supposed engine of economic growth,
internationally and nationally, the housing market, has gone off the tracks. It
is not going to go back on the tracks in 2009. I will regard it as nearly
miraculous if it goes back on the tracks in 2010. So, we had better be getting
ready for a major recession that lasts for over a year, and could conceivably
last for two years.
This is why I do not expect
any additional bubble markets over the next two years. We have seen that the
real estate market was a bubble market. It is in steady fall, and there is no
indication that it is about to reverse.
When a bubble market pops,
he does not recover soon. Think of the NASDAQ stock index. It peaked in March of
2000 at 5040. It is now around 2400. That was a classic bubble market, and has
never recovered. Those who thought it would recover find themselves down over
50% in terms of their equity, and down over 20% more in terms of purchasing
power of the dollar. Nevertheless, they hung on. They thought the market would
recover. They were wrong.
CONCLUSION
The Federal Reserve System
can and will eventually inflate. I monitor the adjusted monetary base. I post it
on my website. It has moved up sharply in the last month. This does not mean
that this is guaranteed to be a new trend, but it does indicate that the Federal
Reserve System has inflated more rapidly than it has in over five years. So, I
do expect long-term price inflation. But I do not expect this to take place over
the next year or two. I think price inflation will slow. It is conceivable that
we could get price deflation for a few months, depending on the severity of the
recession.
The housing market is sufficient, in and of itself, to keep the American economy in a recession mode for the next year. I expect to be a buyer
of houses sometime over the next three years. But this recession should not be
underestimated with respect to commodity prices. You should not expect the
commodity bubble to reappear in the next 12 months, unless there is war with
Iran.
Given what happened on
Friday, August 8, do not discount the possibility of war with Iran. Governments
do stupid things. On Sunday evening, August 10, "60 Minutes" ran its earlier
show on the possibility that the Israeli Air Force is prepared to attack Iran.
The first broadcast was scary enough. The second was even more scary.
August 13,
2008
Gary North [send him mail] is the author of Mises on
Money. Visit https://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary
on the Bible.
Copyright � 2008
LewRockwell.com
https://www.lewrockwell.com/north/north646.html