Aye yai yai. Here we go again. As usual, gold bulls and gold bears are attempting to outdo one another on some unseen scale of hyperbole. The latest comes via Marshal Gittler who is the head of Global FX Strategy. Not content to boast about the recent downdraft in gold, he ups the ante to gargantuan heights. Not only was the multi-year rally in gold “overdone” or “ahead of itself” or some other Wall Street cliché, but the entire thing was just a giant “misunderstanding”. And by that he means that all of the gold bulls were, are, and presumably always will be massive dunderheads. And in this article, he really seems to want to be more than right:
Investors are just starting to realize that their framework for analysis can’t account for what’s happening in the world right now. They are gradually learning that the economics they learned from textbooks needs updating.
You got that? The gold bulls need to “update” their “learning”, but oh my it will be very difficult, because these morons are just now realizing that they don’t know what they are talking about. Now the author does have a legitimate point in his article, although it is nothing new really. But before getting to that, he just can’t resist this temptation to denigrate the bulls. This is typical among the gold bug (and anti-bug) communities, but I tend to think that it undermines the point that Gittler is trying to make. I mean, after all, the gold bugs have made tremendous amounts of money over many, many years. To pop up during a bear run and claim that the bulls were idiots all along seems to be counterintuitive to say the least.
The salient theory in the article appears to be the question on the quantitative easing program’s inflationary effects. Many have argued that it amounts to money printing plain and simple and reading the fine print will just be an exercise in interpreting the fine points of Fed propaganda. Gittler argues that this cannot be inflationary until the banks actually use the extra liquidity to expand their lending programs. The primary reason for that phenomenon is what he calls a “balance sheet recession”:
So long as consumers and companies find that the value of their assets – houses, shopping malls or whatever – are below the value of the liabilities they took on to pay for those assets (a situation technically referred to as “bankrupt”), they will not be in a position to take on new loans no matter how cheap they are. They will only be interested in saving money and repaying their loans.
As you can see there is nothing here that you probably haven’t heard argued many times before. He does go into a bit more depth so be sure to read the whole thing, but essentially it is the usual defense of the Fed’s program. And you know what? He may be spot on. I admit I am skeptical of this argument for reasons I’ll save for another post, but who knows, he might be right. However, even if he is correct in the long run, the bulls were making money for years. They may have been “wrong” all those years, but I doubt highly that they care one whit.