The gold price
Buying Gold for the 1st Time Ever - Wednesday 20th May 2009
What kind of inflation shock drives a professional fund manager to Buy Gold for himself...?
POOR DERMOT GLEESON, writes Bill Bonner in his Daily Reckoning.
The Irish economy is sinking...led by its banking sector. This makes bankers the most despised of all the Irish...and made Gleeson the target of egg-tossing shareholders at the annual meeting last week.
The chairman of Allied Irish Bank had to dodge eggs while getting his message across – whatever it was.
Warning to America's bankers: get ready to duck. But they already know that. So where's the surprise? And which will it be – Japan or Zimbabwe?
We've already said we're expecting both Japan and Zimbabwe...both grinding deflation as the economy sink but also soaring inflation as prices push higher on the tide of zero-bound interest rates and central-bank printing.
What else could it be? At least with Gold Bullion, we're ready for both. But needless to say, we'll no doubt be surprised like everyone else. And needless to say, we don't know what will surprise us. But we have an idea.
Almost everyone we know is expecting a fairly quick up-move in inflation. Our guess is that that up-move might be a long way off.
"It's a very funny and troublesome situation," said a fund manager in Boston last night. "The world's central bankers are committed to a policy of monetary inflation...which they call 'Quantitative Easing'. And they believe that inflation targeting is the way they can tell if their policy is working. That is, they believe they will know when to stop inflating the currency by looking at consumer prices.
"So when consumer prices begin to rise, they'll be ready to stop adding to the money supply. In fact, they say they'll then turn the machine to reverse to take out the extra cash they've added.
"That means they'll keep at it until the Consumer Price Index goes up. But by the time they see consumer prices rise, it will be too late. By then, people will be eager to spend...to get rid of Dollars. And once they begin to spend again, the velocity of money will go up. And with it, inflation rates will go up higher...and then Dollar holders will want to get out of bonds quickly...because they'll see the next move too – a drop in government bond prices.
"How could the Fed combat this rising inflation? Consumer prices could be rising very, very fast at this point. So it would have to go back into the market and sell those bonds that it bought from the Treasury as part of its Quantitative Easing. Selling the bonds would have the opposite effect as buying them. Instead of creating money with which to buy bonds, it would re-absorb money when it sold them. People would pay money for the bonds...and the cash would be sequestered by the Fed.
"So, in trying to withdraw today's extra cash injections from the economy, you'd have the Fed trying to sell bonds just when everyone else was selling them – spooked by inflation - too. At that point, with the biggest bond buyer in the world turning into a seller, the Treasury market would collapse. This would paralyze the Fed. It might want to sell Treasuries. But, under the circumstances...with yields soaring and bond prices crashing...it wouldn't be able. So all the inflation that it put in the system would have to stay there...and inflation would have to run its course.
"It's very hard to know what to do as an investor. I guess in theory you should stay long Treasuries...buy them as long as the Fed is buying. And then you should go short...sell them, just before the inflation numbers turn positive...and just before the Fed tries to sell.
"But that is going to be very, very difficult timing. I began Buying Gold for the first time ever last week."
POOR DERMOT GLEESON, writes Bill Bonner in his Daily Reckoning.
The Irish economy is sinking...led by its banking sector. This makes bankers the most despised of all the Irish...and made Gleeson the target of egg-tossing shareholders at the annual meeting last week.
The chairman of Allied Irish Bank had to dodge eggs while getting his message across – whatever it was.
Warning to America's bankers: get ready to duck. But they already know that. So where's the surprise? And which will it be – Japan or Zimbabwe?
We've already said we're expecting both Japan and Zimbabwe...both grinding deflation as the economy sink but also soaring inflation as prices push higher on the tide of zero-bound interest rates and central-bank printing.
What else could it be? At least with Gold Bullion, we're ready for both. But needless to say, we'll no doubt be surprised like everyone else. And needless to say, we don't know what will surprise us. But we have an idea.
Almost everyone we know is expecting a fairly quick up-move in inflation. Our guess is that that up-move might be a long way off.
"It's a very funny and troublesome situation," said a fund manager in Boston last night. "The world's central bankers are committed to a policy of monetary inflation...which they call 'Quantitative Easing'. And they believe that inflation targeting is the way they can tell if their policy is working. That is, they believe they will know when to stop inflating the currency by looking at consumer prices.
"So when consumer prices begin to rise, they'll be ready to stop adding to the money supply. In fact, they say they'll then turn the machine to reverse to take out the extra cash they've added.
"That means they'll keep at it until the Consumer Price Index goes up. But by the time they see consumer prices rise, it will be too late. By then, people will be eager to spend...to get rid of Dollars. And once they begin to spend again, the velocity of money will go up. And with it, inflation rates will go up higher...and then Dollar holders will want to get out of bonds quickly...because they'll see the next move too – a drop in government bond prices.
"How could the Fed combat this rising inflation? Consumer prices could be rising very, very fast at this point. So it would have to go back into the market and sell those bonds that it bought from the Treasury as part of its Quantitative Easing. Selling the bonds would have the opposite effect as buying them. Instead of creating money with which to buy bonds, it would re-absorb money when it sold them. People would pay money for the bonds...and the cash would be sequestered by the Fed.
"So, in trying to withdraw today's extra cash injections from the economy, you'd have the Fed trying to sell bonds just when everyone else was selling them – spooked by inflation - too. At that point, with the biggest bond buyer in the world turning into a seller, the Treasury market would collapse. This would paralyze the Fed. It might want to sell Treasuries. But, under the circumstances...with yields soaring and bond prices crashing...it wouldn't be able. So all the inflation that it put in the system would have to stay there...and inflation would have to run its course.
"It's very hard to know what to do as an investor. I guess in theory you should stay long Treasuries...buy them as long as the Fed is buying. And then you should go short...sell them, just before the inflation numbers turn positive...and just before the Fed tries to sell.
"But that is going to be very, very difficult timing. I began Buying Gold for the first time ever last week."
Bill Bonner, 20 May '09
Bill Bonner is founder and owner of Agora Inc., one of America's largest consumer newsletter publishers. Editor of free The Daily Reckoning email – now read by more than 500,000 worldwide – he is also the author of three best-selling investment books, most recently Mobs, Messiahs & Markets (John Wiley, 2007).
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