Inflation or Deflation: Wher is gold headed?
Today's Financial News - Posted April 8, 2009
Gold prices have remained in a strange limbo—despite the Perfect Storm that should have propelled it to the $2,000-an-ounce the goldbugs have predicted since 1981. How’s the outlook for inflation going to affect gold prices?
by J. Christoph Amberger
Baltimore—TFN: If you hit Baltimore while driving south from New York or Jersey, you can take the long way north around. Or you can cut right through the city via various tunnels. If you opt for the straight line, you can see the port of Baltimore to your left.
If you look right, you see deflation.
Factory inventories in the United States may have dropped 1.2% in February, according to the Commerce Department. Stockpiles of durable goods may have fallen 2.4% in in the same period, the biggest decline on record. And car inventories may have declined by a record 7.9%.
But if you let your eyes roam around U.S. ports, you can’t help but notice the vast expanses of mothballed supplies waiting for a buyer: Cars as far as the eye can see, with that new car smell competing with tar and heavy fuel fumes.
Ports all over the United States have been forced to vastly expand their warehousing services to accomodate all the unsold merchandize that is piling up.
But look left again, out across the water, and you see inflation:
There are dozens of cargo ships anchored around the ports, waiting to be dispatched back to China or Vietnam or Germany. But nobody calls. They have nothing to do but wait. Because at first, exports piled up at foreign ports when letters of credits stopped clearing.
Now, the domino effect of slacking demand is toppling manufacturers by the thousands. China, which had been plagued by razor-thin margins and factory closings when the going was good, has seen a wave of bankruptcies. Export weltmeister Germany has reduced output and cut jobs as the global financial crisis hammered exports.
In the long run, when all the inventories are finally used up, we might end up with too much money chasing to few goods. The textbook definition of inflation.
Then again, we might not.
For one, there may be no problem of “too much money”. Because the lack of demand has already taken a bite of the most expensive part of production cost: Human labor. Not only has the financial crisis created teeming masses of marginally employed and unemployed in the developing countries. It stripped out entire layers of corporate expenses in the industrialized states, resetting new salaries to levels not seen in more than ten years.
And that just a few short years before the biggest generation since the Baby Boomers pushes into the workplace.
There’s no 100-dollar-tax credit and no vegetable Victory garden on the South Lawn that’s going to change the simple fact that we’re at the cusp of an era of lower household incomes.
That’s the recipe for stagflation.
The real demand for gold
This murky outlook is at the core of gold’s strange price oscillations. With the dollar still high against competitors currencies (at least when compared to last year’s levels) and foreign debt loads and budget deficits almost as bad as the Obama Administration’s promises, the hope for dollar inflation seems too iffy to propel a major breakout.
And the stagflation scenario might just do in what real demand there is for gold. India just reported that its gold imports have bottomed. In Abu Dhabi, gold jewelry sales are down 20%. And even the Chinese do not expect any growth in the volume of gold sales in 2009.
But 60% of world demand for gold derives from jewelry sales. If demand is regressive, only decreasing supply could hold prices stable. But China alone has ramped up gold production to reach a record high in 2008. Its stimulus program and jitters about dollar stability make it a sure bet that gold production will be the last thing to be cut back.
Plus, private gold stashes have been traded in for petty cash from Duluth to Delhi. There will be no shortage of gold to speak of.
What does it all mean?
We say exercise caution when diversifying into gold. Its 10-20% oscillations over the past six months may have left us with a more solid baseline than the equity markets. But its upside as a speculative commodity doesn’t make it any safer than shares in US automakers.
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