PAUL KRUGMAN, AN INFAMOUS (((KEYNESIAN))), RECENTLY CLAIMED THAT THE PRICE OF GOLD WAS RISING DUE TO A FALL IN REAL YIELDS, NOT BECAUSE OF INFLATION!
HIS BELIEF IS THAT INTEREST RATE YIELDS ON TREASURIES AND OTHER SAFE ASSETS BEING NEGATIVE ADJUSTED FOR INFLATION IS THE PRIMARY FACTOR OF DEMAND FOR GOLD, AN ASSET THAT HAS NO YIELD, ONLY CARRYING COSTS! HE DOES NOT BELIEVE THE DEMAND FOR GOLD IS FUELED BY A DESIRE TO SEEK PROTECTION FROM INFLATION!
HIS POSITION CONTAINS MANY FLAWS, TOO MANY, IN FACT TO LIST IN ONE TRADING VIEW POST, BUT HERE ARE THE MOST FLAGRANT:
1) THE FALL IN REAL YIELDS IS DUE TO INFLATION OF THE MONEY SUPPLY, WHICH INEVITABLY LEADS TO PRICE INFLATION! A FALL IN INTEREST RATES IS CAUSED BY AN INCREASE IN AVAILABLE LENDABLE FUNDS, WHICH IS THE MOST DIRECT CONSEQUENCE OF FINANCIAL INFLATION! THIS IS INDICATED BY THE VELOCITY OF MONEY, AS THE VAST MAJORITY OF CURRENCY CREATED BY THE FINANCIAL SYSTEM AND THE CENTRAL BANK IMMEDIATELY FLOW INTO INTEREST-BEARING ASSETS, LOWERING THEIR YIELDS!
2) THE TRUE PRICE INFLATION RATE IS SEVERAL TIMES HIGHER THAN WHAT IS OFFICIALLY DECLARED, AND EXTRAPOLATING THIS FACT TO THE PAST HALF-CENTURY OF DATA, REAL YIELDS WERE INCREASINGLY NEGATIVE DURING THE 1980s AND 1990s, WHILE THE PRICE OF GOLD FELL, INVALIDATING HIS THEORY!
3) AS THE MONEY SUPPLY, RESPONSIBLE FOR PRICE INFLATION, HAS INCREASED FAR MORE THAN NOMINAL YIELDS HAVE DECREASED, THE FALL IN REAL YIELDS IS NECESSARILY MORE OF A CONSEQUENCE OF INFLATION THAN OF A LOW-GROWTH, LOW-YIELDING ENVIRONMENT!
4) A RISE IN ALL PRICES CAN ONLY BE DUE TO INFLATION, AND THEREFORE ANY PARTICULAR INCREASE IN PRICE IN AN ENVIRONMENT OF GENERAL PRICE INFLATION IS NECESSARILY A CONSEQUENCE OF INFLATION, REGARDLESS OF THE FACTORS FUELING ITS DEMAND! GOLD HAPPENS TO BE RISING FASTER THAN OTHER ASSETS/COMMODITIES AS IT HAS CONSISTENTLY PRESERVED ITS VALUE DURING PREVIOUS INFLATIONARY EPISODES WHILE REMAINING HIGHLY LIQUID!
5) IF A FALL IN REAL YIELDS WAS RESPONSIBLE FOR INCREASED DEMAND FOR GOLD, WOULDN'T DEMAND FOR CASH BALANCES AND PHYSICAL CASH BE EQUAL TO OR GREATER THAN GOLD, AS THERE IS WAY LESS CARRYING COST? YET THIS IS NOT THE CASE, EVIDENCED BY INCREASES IN VIRTUALLY ALL PRICES RELATIVE TO INCREASES IN M0/M1, A FALL IN THE DXY, AND, IRONICALLY, A RISE IN THE PRICE OF GOLD.
6) WHY IS THE PRICE OF SILVER AND METALS RISING AT A GREATER RATE THAN GOLD? THESE ASSETS ARE FAR LESS LIQUID AND ARE HISTORICALLY PERCEIVED AS VOLATILE PLAYS ON INFLATION!
www.shadowstats.com/
www.zerohedge.com/ma...ng-soaring-inflation
HIS BELIEF IS THAT INTEREST RATE YIELDS ON TREASURIES AND OTHER SAFE ASSETS BEING NEGATIVE ADJUSTED FOR INFLATION IS THE PRIMARY FACTOR OF DEMAND FOR GOLD, AN ASSET THAT HAS NO YIELD, ONLY CARRYING COSTS! HE DOES NOT BELIEVE THE DEMAND FOR GOLD IS FUELED BY A DESIRE TO SEEK PROTECTION FROM INFLATION!
HIS POSITION CONTAINS MANY FLAWS, TOO MANY, IN FACT TO LIST IN ONE TRADING VIEW POST, BUT HERE ARE THE MOST FLAGRANT:
1) THE FALL IN REAL YIELDS IS DUE TO INFLATION OF THE MONEY SUPPLY, WHICH INEVITABLY LEADS TO PRICE INFLATION! A FALL IN INTEREST RATES IS CAUSED BY AN INCREASE IN AVAILABLE LENDABLE FUNDS, WHICH IS THE MOST DIRECT CONSEQUENCE OF FINANCIAL INFLATION! THIS IS INDICATED BY THE VELOCITY OF MONEY, AS THE VAST MAJORITY OF CURRENCY CREATED BY THE FINANCIAL SYSTEM AND THE CENTRAL BANK IMMEDIATELY FLOW INTO INTEREST-BEARING ASSETS, LOWERING THEIR YIELDS!
2) THE TRUE PRICE INFLATION RATE IS SEVERAL TIMES HIGHER THAN WHAT IS OFFICIALLY DECLARED, AND EXTRAPOLATING THIS FACT TO THE PAST HALF-CENTURY OF DATA, REAL YIELDS WERE INCREASINGLY NEGATIVE DURING THE 1980s AND 1990s, WHILE THE PRICE OF GOLD FELL, INVALIDATING HIS THEORY!
3) AS THE MONEY SUPPLY, RESPONSIBLE FOR PRICE INFLATION, HAS INCREASED FAR MORE THAN NOMINAL YIELDS HAVE DECREASED, THE FALL IN REAL YIELDS IS NECESSARILY MORE OF A CONSEQUENCE OF INFLATION THAN OF A LOW-GROWTH, LOW-YIELDING ENVIRONMENT!
4) A RISE IN ALL PRICES CAN ONLY BE DUE TO INFLATION, AND THEREFORE ANY PARTICULAR INCREASE IN PRICE IN AN ENVIRONMENT OF GENERAL PRICE INFLATION IS NECESSARILY A CONSEQUENCE OF INFLATION, REGARDLESS OF THE FACTORS FUELING ITS DEMAND! GOLD HAPPENS TO BE RISING FASTER THAN OTHER ASSETS/COMMODITIES AS IT HAS CONSISTENTLY PRESERVED ITS VALUE DURING PREVIOUS INFLATIONARY EPISODES WHILE REMAINING HIGHLY LIQUID!
5) IF A FALL IN REAL YIELDS WAS RESPONSIBLE FOR INCREASED DEMAND FOR GOLD, WOULDN'T DEMAND FOR CASH BALANCES AND PHYSICAL CASH BE EQUAL TO OR GREATER THAN GOLD, AS THERE IS WAY LESS CARRYING COST? YET THIS IS NOT THE CASE, EVIDENCED BY INCREASES IN VIRTUALLY ALL PRICES RELATIVE TO INCREASES IN M0/M1, A FALL IN THE DXY, AND, IRONICALLY, A RISE IN THE PRICE OF GOLD.
6) WHY IS THE PRICE OF SILVER AND METALS RISING AT A GREATER RATE THAN GOLD? THESE ASSETS ARE FAR LESS LIQUID AND ARE HISTORICALLY PERCEIVED AS VOLATILE PLAYS ON INFLATION!
www.shadowstats.com/
www.zerohedge.com/ma...ng-soaring-inflation