Gold Boosters Still Inflation Obsessed?

This morning’s article at MarketWatch, How Yellen’s gamble screwed up gold has some content that is right on the money.  Specifically about rising ‘real’ interest rates being bad for gold.  They are, no ifs ands or buts.

But then it goes off course, just like so many people who manage gold’s price for the wrong reasons.  The whole concept that Yellen did something ‘wrong’ as applies to gold is off base.  The old Velocity of Money and Deflation arguments come into play as well…

The Fed wants out of the business of stimulus, but at the same time can’t risk deflation. Perhaps by threatening higher rates, a sense of urgency will kick in by economic actors and force the velocity of money to rise as people borrow now “before it’s too late.”

It seems that most people believe that the Fed’s policy needs to manifest in rising economic activity and hence rising costs (inflationary effects) for gold to do well.

Historically, gold tends to do well in environments where inflation is higher than nominal interest rates.

Correct Michael.

If Yellen’s gamble does not work, and her threat of higher rates does not increase borrowing and inflation through increased velocity, then the market may freak out on higher real rates, and break gold’s recent uptrend.

This is ultimately good because it will clean out the gold bugs that believe stimulus needs to manifest in economic activity, which in turn drives up prices.

It would be in the contraction that gold’s merit would be of value.  It would be in economic deceleration, for the 10,000th time.  It is no wonder the precious metals are so violent in the ups and downs with all of this misperception built in to its supposed investor base.  A bunch of skittish casino patrons betting on inflation vs. deflation and taking it out on the gold market every time some policy maker flaps her jaw.

Do not be a gold bull when the economy is accelerating and short term yields are rising relative to long term yields (last week was a reaction, but watch to see if a trend develops or not).  Be careful as a gold bull when the economy is strong and the inflationists are out front touting gold.

Be a gold bull when stimulus fails, the shit hits the fan and the economy starts to follow suit.  Be a gold bull when the Fed appears to have lost control or is boxed in, not when it is in complete control with the market lapping up every word as if it came from the market god herself.