Commodities Essential - November 4, 2011

Is gold signaling business as usual?  


As any fan of Austrian economics will agree, a natural rate of interest is one that most effectively organizes the productive resources of an economy, in an invisible-hand sort of way. Abnormally low interest rates breed inefficiencies and imbalances, encourage excessive debt, and create disincentives to save.


Schiff also does well to acknowledge the frequent disconnect between markets and fundamentals. He alludes to the classic “wall of worry.” Granted it’s a lot easier to talk about the wall of worry than it is to actually predict the consequent market reaction over various time frames. A “wall of worry” mood could merely be short-term sentiment within a broader “slope of hope” mood. In other words: monitoring sentiment in this way helps to explain seemingly inexplicable price action in hindsight, but it is not quite as obvious to apply in a predictive fashion.


Which is why Schiff also resorts to his classic position: blame the Fed.


Admittedly, the perpetual quantitative easing story is hard to argue against. While it doesn’t guarantee gold must go higher (since a major shift in risk appetite could trump Fed-provided liquidity), Schiff could be right. The two most important central banks took to the airwaves this week and there certainly wasn’t a hawk to be found.


Commodities Essential. 4 November 2011