|
July 11, 1997
There were no releases of economic data worth noting, and bond and mortgage rates stayed about where they've been for the last three weeks: T-bonds at 6.55%, and thirty-year mortgages at 7.75% on "zero and zero" terms.
Economists may have been quiet, but there was at least one extraordinary market event: the price of gold fell to a ten-year low, trading under $320/oz.
Every one of Alan Greenspan's lectures includes a dissertation on "inflationary expectations", the Great Satan of central banking. You can cause a recession (if you are Alan), you can shrink the money supply, you can raise the cost and supply of credit -- every trick in the Fed's bag -- but to whip inflation, you must convince everybody that prices tomorrow will be the same as prices today.
Gold is an industrial commodity, a collectors' item, and consumed in greatest part as the raw material for jewelry. As an investment, it pays no interest, is difficult to carry, spend, and safeguard, and has value only if you expect its price to rise. Gold is the all-time best measure of inflationary expectations, and as of this week it is clear that those expectations have been crushed.
$320/oz is a minor drop from the $375-400/oz of the last several years, and a painful but not disastrous drop from the $800/oz high of 1980. Until you consider inflation: gold's $800 value in 1980 converts to $1,570 in 1997 dollars; from $1,570 to $320Š that's a disaster. Gold is a great inflation hedge, but you can get trimmed both ways: in constant dollars, gold has fallen 80% in 17 years. So have the expectations of inflation.
The drop to $320 was triggered by an astounding event. Australia made public this week that it has sold, gradually, this year two-thirds of its gold reserves -- 167 metric tons.
A nation's gold reserves used to be the key measure of its economic strength, and the backing for its currency and trade. Now, money is electronic, no longer having even the minimal substance of paper, and the value of money is set by market discipline. Why should a nation hold a mere industrial commodity, bearing no interest, requiring armed guards, when it could be sold and turned into something useful, like money?
If you have no expectation of inflation, there is no reason at all not to sell. Australia is the biggest, but has been joined by most of the central banks in Europe. Some decent -- at least solid, if drafty -- real estate may soon be on the market in Fort Knox, KY.
If the inflation-controlling central banks themselves have lost their fear, it may help explain why a six-something yield looks attractive to T-bond investors. If the fear is really goneŠ do I hear five?
|
