Incrementum AG – In Gold we Trust 2014 – Extended Version
Our last gold report was published on 27 June 2013, just as the anxiety over the metal’s declining price trend reached its peak. In hindsight, this date turned out to coincide with a multi-year low. Last year, we came to the conclusion that massive technical damage had been inflicted and that it would take some time to repair the technical picture.
That forecast has turned out to be correct, even though the counter-trend move we expected turned out to be significantly weaker than thought. Recent months show clearly that many speculators have given up on the sector. A majority of bulls appear to have thrown in the towel. Volatility and market participant interest have decreased significantly in the last year.
With their monetary interventions, central banks have entered terra incognita. Monetary policy doesn’t work like a scalpel, but like a sledgehammer. Superficially, extreme monetary policy stimulus has calmed financial markets overall. The results, in terms of the real economy by contrast, continue to lag behind expectations. The often invoked ‘selfsustaining recovery’ is rather modest in many regions and is not ‘selfsustaining’ anywhere so far. It will probably still take months or years before the full extent of the collateral damage from these monetary measures will become visible. In our opinion, these will be predominantly negative. Interventions always result in keeping existing misallocations afloat, while new ones are added to them.
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The current “lowflation” environment that still prevails, which is characterized by low price inflation and growth figures that largely remain below expectations, has turned out to be a Land of Cockaigne for stock market investors. As long as stimulus does not show up in inflation data, market participants don’t fear a drying up of the monetary aphrodisiac. Among investors, the prevailing sentiment is “the crisis was yesterday”, and the “Yellen Put” is considered an integral feature of asset allocation decisions in many portfolios. The longer the low interest rate environment continues, the more investors will be pushed toward excessive risk tolerance.
What is already clearly recognizable is that these massive market interventions marked a regime change: while before 2008, a balance between economic growth and moderate price inflation were the focus of central bank efforts, central bankers have in the meantime mutated into slaves of the financial markets. The continual artifices of banking and currency policy appear to have now become a necessity, so as to prolong the continued existence of the fiat debt money system.
As readers of our annual report know, we analyze gold primarily as a monetary asset and not as an industrial commodity. In our eighth “In Gold We Trust” report, we want to once again take a sober look at the big picture and perform a holistic analysis of the gold sector.
In Gold We Trust 2. Assessment Of The Monetary Climate
a.) 1971: Monetary Paradigm Change
The virtualization/dematerialization of the monetary system at the beginning of the 1970s unleashed monetary policy and enabled disproportional growth of credit and debt. Economic activity based on savings and real investment was replaced by a credit-induced growth mania. In today’s debt money system, credit-induced growth is mainly “created” by pumping additional money into the economy through an increase in lending by the banking system or by an increase in government debt.2 The superficial stability of financial markets now depends to a large extent on ceaseless monetary inflation. Since commercial banks are currently not contributing sufficiently to credit expansion, this has to be compensated by unconventional central bank monetary policy measures.
This debt-induced growth is strikingly demonstrated in the above chart. “Total credit market debt owed” in the US has risen 35-fold since 1971, the monetary base 54-fold and GDP only 14-fold. The visible dip in debt expansion since 2008 had to be compensated by the Fed’s major expansion of the monetary base. Last year, we introduced the term ‘monetary tectonics’ to designate this situation, which describes the interaction between credit deflation and central bank-induced inflation.