Thursday, May 15, 2014
Gold: It's all about one thing: Confidence
You'll be reading tons about gold as the "Recovery" story begins to lose its plausibility.
Most commentary will link gold to the dollar, GDP, the Euro, China, the BRICS, and especially that old saw "Inflation."
Sure, there will always be correlations. But correlations have nothing to do with causation.
And none of those things listed above can cause gold to move.
The only thing that moves gold is CONFIDENCE - or the loss thereof.
Confidence in a sound banking system.
The banking system is the source of dollar strength or weakness, because the US Central Bank has a monopoly on dollar creation.
The banking system is the source of GDP as the banks allocate capital.
The banking system creates inflation or deflation by setting rates and issuing and allocating money.
And as long as the global public, and mostly the US public maintains an enduring faith in the efficacy of the global banking system, which is led by the US Central bank, gold will dither.
Faith cracked in 2008 and gold soared.
Just as faith cracked in 1979 and set gold soaring. Sure inflation got out of hand, but that was a correlation. The cause was a loss of confidence in the banking system.
Right now the mainstream media, especially the Wall Street Journal, Fox News, CNBC and Bloomberg are leading a concerted cheer leading effort to pump confidence into the global banking system that owns them.
They write story after story about how Tarp was all paid back and the banks have been stress tested and that balance sheets have been restored blah blah blah.
And it's working. Just look at the stock market.
But confidence is a funny thing. People really want to believe in their institutions. And that's half the battle. The other half has to do with the institutions looking out for their clients: the US public.
But when you have a banking system that's addicted to gambling with infinite leverage, a banking system whose mission is to extract every last cent of capital from the economy, you're bound to eventually compromise confidence.
And when confidence goes - again - that's when gold when take off - again.