Monday, September 19, 2011

Money is Printed and Gold Falls? Hmmm

The big news of the day: The worlds big central banks (The Fed, ECB, SNB, BOE, and BOJ) have all joined hands to provide liquidity to parched banks.As some might say: money printing! Well, despite the common belief that there's a connection between liquidity pumping and gold rising, today that's not happening, and in fact gold is tanking, falling well below $1800 (it was above $1900 recently).Whatever benefit gold gets from easy money was cancelled out by a brief removal of the "fear" premium.  --Business Insider, 9/15/11
I think this is more extraordinary than BI thinks. The arguments for buying gold are continuously advertised by gold brokers as: "They are printing money and the world economy will soon collapse. All your savings in fiat currency will be wiped if you don't buy gold, and we have the best prices. Trust no one but us." Remember when countries acted in unison to start selling oil stockpiles? They were attacking oil speculation in a coordinated way. Remember when suddenly all the banks raised the rates on loans for silver? They were attacking silver speculation in a coordinated way. Gold speculation? Hmmm.

Now we see a coordinated activity to pump the much needed money into the system. Stimulus is of course what is missing in our current race to see who can be more frugal-- as a double dip recession is forming! It is insanity and the big guys know it. So, government action being all but impossible in the USA, this is obviously the only course of action. They know there has to be a way to get that money out there circulating and creating demand. The way is decidedly not in putting money into gold where it might not rust but sits doing nothing. It IS in printing money, which seems to be easy everywhere--Tea Parties be damned.

Investing in gold seems less like a smart move even when "they are printing money..." because the second part of the pitch is "...the world economy will collapse." Printing money is actually the right thing to do in a world wide recession where other options are off the table. The world economy is then less likely to collapse.

For those who said the Fed had run out of bullets, can we re-examine now?

I have been talking off the top of my head when I would tell people that we need to print money everywhere, like we are actually now doing, much to my surprise. I had odd reasoning, and I don't know much about things. This post is way, way over my comfort level because I am not particularly well grounded in economics. But I have been wondering for a while just what would happen if every single country printed money at the same rate.

What exactly would happen? Inflation or deflation of a currency is usually measured relative to another country's currency. They would all grow the same. So the international problems with inflation in trade would not be tough. I'm guessing that inside a given country, prices would eventually go up as more money was spent. That however is exactly what we want-- more demand. The drop in value for money in savings would result-- thus more demand. Spend it now before prices go up.

It took me by surprise when gold fell the day they decided to let the world know they were going to print money. Now that I think about it, it is not surprising at all. 1) there is more risk that the world can mount a coordinated attack on gold speculation, foreshadowed by silver and oil actions. 2) the banks finally are worried enough, or influenced by leaders enough, that they do the right thing by printing money in a coordinated way (coincidentally or shamelessly before an American election year.) Gold speculators themselves ran for the hills even though they previously claimed they were logically buying it because of the increase in printed money. That is extraordinary because it reveals that the pessimists really do feel that printing money might just work. "A brief removal of the fear premium" hardly states it well. However briefly, they believed it was the right thing to do, all their previous advice to the contrary.