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Ignore the 'Goldfrueders' - Gold Remains a Great Store of Value

April 24, 2013 | About:

Conventional wisdom on Wall Street is often worth the price paid (i.e., nothing). But some hoary nuggets have value.

"Sell in May and go away," for example, is based on a true and powerful phenomenon.

As Mark Hulbert reports on MarketWatch:

Over the past 50 years, the Dow, on average, has produced a gain of 7.5% during the winter months and lost 0.1% during the summer months.

The "sell in May pattern also exists in other countries besides the US. Ben Jacobsen, a finance professor at Massey University in New Zealand, reached that conclusion after studying all available historical evidence from each of 108 separate stock markets around the world. For example, his statistical tests detected the seasonal pattern in the British stock market as far back as 1694.

Any pattern with that kind of staying power is driven by very powerful forces. That the pattern is global is further evidence it is worth paying attention to.

And in 2013, something more ominous lurks. Commodities, Treasurys and recent economic data readings are openly telegraphing deflation and the failure of central banks in the developed world to revive flagging.

You don't have to look too hard for telltale signs of deflation. Prices for crude oil and copper – two of the most growth-sensitive commodities – are falling, not rising.

Treasury bond yields are falling, not rising (despite no changes in Fed buying). Falling yields are a classic deflation omen.

In the US, recent manufacturing and jobs data have disappointed. So have retail sales and consumer confidence readings.

New fears of deflation and global slowdown also help explain gold's recent price declines.

If the world is slowing in spite of massive debt monetization by developed-world central banks... and if European leaders can strong-arm bankrupt governments in Cyprus and Portugal into selling their gold... investors are starting to question gold's value as a hedge against inflation and further fallout from the ongoing European crisis.

But to write off gold's long-term value would be myopic.

A period of price adversity, coupled with a flushing out of "weak hands and hot money holders, is a far different thing than permanently dismissing the value of gold or declaring the decade-plus gold bull market to be "over.

For that to happen, you would have to see the macroeconomic drivers behind gold's 13-year bull market change... and change significantly. And that clearly isn't the case.

Have central banks in the US, Japan and Britain stopped deliberately debasing their currencies? No. Have the deadly serious economic issues plaguing Europe, the US, China and Japan tied themselves up with a neat little bow? No. Has there been a swing from negative real interest rates in the developed world (and China) to positive real interest rates? No.

This hasn't stopped an outbreak of joy at the sharp decline of gold prices – what you might call "goldenfreude – in the mainstream press. Most of this, of course, comes from neo-Keynesians such as Paul Krugman. But it has nevertheless rattled the nerves of many individual gold investors.

If you own gold... or are thinking of buying some following recent price declines, you must first understand that gold's recent sellers fear deflation.

You must also grasp two important things about deflation:

  1. Modern central bankers loathe and fear deflation more than anything. They will do anything to stave off the threat of a deflationary downward spiral.

  2. The "first deflation, then inflation scenario still ultimately manifests inflation 100% of the time. This happens either by way of late withdrawal of monetary stimulus by central bankers in the case of a genuine recovery... or because central banks go "all out to defeat deflation and end up severely debasing fiat currencies as a result.
In this light, drivers of the gold sell-off make sense. It has nothing to do with the false narrative painted by the "goldenfreuders.

Understanding this allows us to foresee the endgame. One way or another, gold's status as a store in a time of central bank folly will be confirmed.

Carpe Divitiae,



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