28 April 2006

How Central Bankers Fritter Away Their Time

Brainstorms: "Gold has topped $600/oz. for the first time in 25 years. Unfortunately, for real contrarians, it is making front page news. However, financial media commentary remains fairly ignorant on the subject. The preferred explanations for gold’s rise are mostly benign: it’s the Chinese and the Indians (ooh, they just love bangles, it’s part of their culture); it’s the allocation to commodities that has grown so popular (tangible assets are the rage with all the savviest hedge funds-the Chinese need so much more stuff); it’s the difficulty of bringing new mines into production (you know, the tree huggers hate mining so much); it’s the central banks who have decided that selling gold was not such a great idea in the first place and have now shied away from dumping their reserves (just a bunch of stupid bureaucrats, anyway). These “explanations” all have an element of truth. Any reader of our past website articles would have seen it coming.
However, the Wall Street Journal, CNBC and the equivalent will not tell you that gold is rising because there is a surfeit of paper assets. They will not tell you that a rise in the gold price has historically been a harbinger of bear markets in bonds and stocks and hard times for the financial business. The Pavlovian response of the financial media to the crossing of the $600 threshold was as predictable as their inability to comprehend or to portray the significance.
In truth, the price of gold at $600 is no big deal. In 1980 dollars, it is only $300. If prior highs mean anything, a target of $1700 in today’s dollars is what investors should be thinking about. In our view, gold remains cheap, another sign that the financial markets continue to under-price risk. Investors should worry less about whether t"

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