HARD ASSETS: THE CRITICALITY OF THE MARGINAL BUYER

 

In all hard asset markets there's an economic fact that the last item sold in a limited market is dependent on the "Criticality of the Marginal Buyer."  That means that last person to buy a limited item sets the price in the SHORT TERM.  In the Rare Coins and Medals market there are many items that because of grade, mintage, die, provenance, whatever are rare to the point that only one  may come to auction every year or two years or more.  When the hammer falls that is the price that everyone looks to as the market price for that item.

Yet that price is contingent on much more than the item itself.

It is contingent on the expertise and accesability of the auction house.

It is contingent on the Export laws  and currency barriers of the country in which it is auctioned.

And most of all, it is contingent on the prevailing economic global conditions.

Right now every country on earth is suffering from two terrible afflictions.  Massive Debt and Inflation.

The massive debt demands low rates and loose monetary conditions that encourage ever higher prices for hard assets.

The resulting inflation - that will not come down because of deglobalization - necessitates tighter monetary conditons.

Both can't exist at once.  

Japan has hit the wall because they are exercising yeild curve control to keep rates down which necessitates easy monetary policy and at the same time they need to support their currency (which is falling rapidly) by tightening monetray policy.  

What's a Central Bank to do?

Every country is to some degree in the same boat.

And there's nothing to do.  You can't fight inflation when suffering a debt overhang.

And you can't service a massive debt without keeping rates at a level that fuels inflation.

What does this mean for the Criticality of the Marginal Buyer?

It means that as monetary policies careens wildly from easy to tight to easy to tight and currencies fluctuate wildly as a result you are going to to get LAST ITEM BOUGHT prices that will be wildly differing as they reflect the careening monetary and currency positions of various countries at various moments.

So don't get caught up in a particular price influenced by the conditions at the moment that last piece was auctioned.  It may be temporarily lower or higher than seems reasonable.

But over time, the critical element is the massive global debt.  

Any central bank can make noise about beating inflation.  But ultimately any economy with massive debt will implode under a tight monetary regime.  

So over time liquidity must be ever greater to bail out imploding companies, banks, municipalities and ultimately central banks,

So over, time in hard times, hard assets must rise.